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The only way is up. For the dollar, that is, as fears of a new global crisis spread through financial markets.
Unlike its predecessor in 2008, this crisis will be triggered by the euro zone as European leaders fail to resolve the debt problems of peripheral members.
For the first time, investor confidence in the whole euro process appears to be collapsing and, as the threat of a sovereign default increases, the risks of a new round of financial contagion are rising sharply.
Evidence of the problem is not only in the sharp rise in the borrowing costs of major euro-zone members such as Italy, France, Spain and even Belgium, but in the wholesale removal of funds from global equities as well as the markets in emerging nations, which up until now have proved fairly popular.
The impression is one of risk being removed from the table to a greater extent than has been seen for some time. For example, in Japan new securities data on Thursday showed a net inflow of Y2.8 trillion. According to Morgan Stanley this was triggered by Japanese accounts selling foreign bonds and placing funds back into yen money markets. The bank suggests that the holdings of Japanese life insurers in the euro zone could also now be under threat given that financial authorities in Japan have started monitoring their exposure.
Emerging market currencies, which for long have offered at least some respite from the turmoil in more developed countries, have also come under selling pressure. From Eastern Europe to South America losses have been tracked up as investors who were once happy to take the risk of more exotic investments have started to get cold feet.
But, it isn’t only fears over the euro zone that are sending a chill through financial markets. Although recent economic data from the U.S. have been positive, the outlook for global growth remains highly doubtful. In the last day or so not only has Japan reported a sharp drop in machinery orders, after they showed signs of improvement, but China reported a slowdown in the growth of exports to an annual rate of 15.9%.
Neither of these suggests that a serious recovery in global consumer demand is on its way and that there will be little to help prevent the recession that is starting to loom over the euro zone.
By contrast, figures earlier this week from the U.S. showed a surprising decline in wholesale inventories last month, contributing to hopes that after months of weakness, growth in the U.S. may be accelerating even faster than expected.
Given the lack of good news elsewhere, there is every reason to expect the dollar index, which has already risen about 2% this week, to continue rising for now.
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You would attempt to persuade us that this euro crisis has almost nothing to do with what happened in 2008 when the real underlying values of colateralized debt obligations became known and 17 Global Banksters who created the world wide realestate Fraud got caught and Lehman Bros. went down and The Federal Reserve gave away $ 2 trillion USD to US Banksters and $ 16 Trillion USD to Euro Banksters in 2008. You claim that all of that is in no way related to this second wave of Euro Bankster collapses a la Lehman Bros. It is all just a convient coincindence that it is the very same 17 Banksters again crying too big to fail.
If this euro crisis lasts for awhile longer and over its duration the U.S. dollar becomes a favored safe haven, the U.S. economy in 2012 will very likely face its worst nightmare: deflation. And you can bet this possibility is uppermost on Bernanke’s mind.
Indeed, just today it was announced that U.S. import prices fell last month. Add to that the still weak U.S. consumer economy and other telling anecdotal evidence, such as banks declaring they’re awash in “useless” cash deposits (see WSJ, NYT stories) – and you sense that an additional “shock” to the dollar supply by safe haven investors could be the final push into a deflationary spiral.
If Bernanke (and other Fed bankers) share my basic reasoning, presumably they will have to intervene again – some sort of QE3 or something more “exotic.”
No reason to be alarmist here, of course, but it’s intriguing to note how a flight from crisis can potentially trigger deflation (itself a crisis) in a safe haven economy. Japan and Switzerland have already learned this fact. the U.S. might learn about it next year: an excessively strong currency can kill an economy quickly.
Mr. Dick Turpin
big bang for the buck
The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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