Weak USD not inflationary?

D

Daal

The cut doenst seem all that insane when you look at some reasearch
http://www.newyorkfed.org/research/current_issues/ci13-5.pdf

Most imports are priced in dollars so a weak dollar doesnt change anything, exporters to the US are worried about losing US market share if they raise prices so they frequently decide to drawdown their profit margins instead. Also a part of import prices is distribution costs in the US which doesnt change with a weak dollar(their in dollars)

the idea that currency weakness is inflationary is mostly right but when it comes to the reserve currency of the world it doenst applies as much as you would expect
Thats what this paper says.
 
Interesting. I guess that makes some sense. Daal, what is your long term outlook on the dollar? Do you foresee the Euro ever displacing the dollar as the world's currency?
 
Quote from Daal:

The cut doenst seem all that insane when you look at some reasearch
http://www.newyorkfed.org/research/current_issues/ci13-5.pdf

Most imports are priced in dollars so a weak dollar doesnt change anything, exporters to the US are worried about losing US market share if they raise prices so they frequently decide to drawdown their profit margins instead. Also a part of import prices is distribution costs in the US which doesnt change with a weak dollar(their in dollars)

the idea that currency weakness is inflationary is mostly right but when it comes to the reserve currency of the world it doenst applies as much as you would expect
Thats what this paper says.
More...


A Weaker dollar Making commodities cheaper for other non Dollar countries would encourage a greater demand in those countries and push up prices in US dollars anyway?
 
most of the countries have at least part of their reserves in other currencies

For example russia has 50% of their reserves in Euro. Not sure they will continue to increase euro share but they upped it every quater till it reached 50%

So the process has started. Noone can print money just because it's reserve currency
But by printing money unlimited thinking other are idiots they can lose this status soon
 
Quote from clacy:

Interesting. I guess that makes some sense. Daal, what is your long term outlook on the dollar? Do you foresee the Euro ever displacing the dollar as the world's currency?
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long-term bear for two reasons
1-current account deficit and its implications http://ideas.repec.org/p/fip/fedgif/692.html
if you add that the trade deficit is not likely to be closed because of the first study you see that the most likely way out of this is a weaker dollar
2-the long term trend is down

With that said I still try to play rebounds here and there
The common argument against the euro is that they will not survive because no currency union has ever survived, well no gold standard or any fiat currency ever survived either so that doesn say much, if it can or not surpass the dollar I have no idea, it might take a long time till it happens so Im not focused on that.
I do use the euro along with the cad for my dollar hedges because they dont carry a huge current account deficits and currently are not considered risky assets like gbp or nzd so they dont get nailed on global problems
I wish I could use the chf but its lagging so much that im giving up on it for now till starts to act better
 
Quote from Daal:

The cut doenst seem all that insane when you look at some reasearch
http://www.newyorkfed.org/research/current_issues/ci13-5.pdf

Most imports are priced in dollars so a weak dollar doesnt change anything, exporters to the US are worried about losing US market share if they raise prices so they frequently decide to drawdown their profit margins instead. Also a part of import prices is distribution costs in the US which doesnt change with a weak dollar(their in dollars)

the idea that currency weakness is inflationary is mostly right but when it comes to the reserve currency of the world it doenst applies as much as you would expect
Thats what this paper says.
More...

Daal one of few lonely voices of reason on this site.
 
Quote from Daal:

The cut doenst seem all that insane when you look at some research
http://www.newyorkfed.org/research/current_issues/ci13-5.pdf

Most imports are priced in dollars so a weak dollar doesn't change anything, exporters to the US are worried about losing US market share if they raise prices so they frequently decide to drawdown their profit margins instead. Also a part of import prices is distribution costs in the US which doesn't change with a weak dollar(their in dollars)

the idea that currency weakness is inflationary is mostly right but when it comes to the reserve currency of the world it doenst applies as much as you would expect
Thats what this paper says.
More...

The risk is not inflation it is deflation. Profit margins in the EMs (where most of the stuff the US imports comes from) are already razor thin. A falling $ will have the effect of putting many EM companies out of business unless their government can weaken their own currency. The problem is that they can not do that as they need to buy raw materials to manufacture what they export to the US. They are between a rock and a hard place. Exacerbating this will be the falling demand in the US keeping making pricing power by the US importers null (we have already seen this in consumer electronics in the last two years). In short what we will experience is a global contraction of trade, all this at a time when capacity is so high on the back of massive leverage. Shiver.
 
When the rest of the world has had enough of the US exporting its inflation to it, deflation will follow, but not for the US. It's lining itself up for the mother of all inflations under an idiotic Fed.

Faber makes more sense to me than the New York Fed:

http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vCoNtU.D0pcE.asf

Also came across these two articles today which may be of interest:

http://www.wallstreetwindow.com/drupal/node/4586

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/bcnsaudi119.xml
 
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