Interest Rate Roundup

Friday, November 02, 2007

Dollar = Confetti redux

You know, I kind of get tired of saying it. But once again, the U.S. dollar is getting shredded. The Dollar Index was recently down 36 bps to 76.24 ... the Canadian dollar was recently up again (to more than $1.06) ... the Australian dollar was recently up ... the Swiss Franc was recently at its highest since early 2005 ... and the euro was above the $1.45 level. The dollar can't seem to rally on good news ... and it gets whacked on bad news. The "strong dollar" policy that we occasionally hear about from Treasury has proven to be total bunk, and the Fed isn't doing anything to support the greenback either with its interest rate policy.

Ask 10 different people whether a falling dollar is good or bad, and you'll probably get 10 different answers. But frankly, I share the opinion that no country has devalued its way to prosperity. And the falling dollar is fueling plenty of inflation, even if the CPI doesn't capture it. Indeed, anyone who claims $95 oil or $800+ gold has nothing to do with a plunging dollar should have his head examined.

The bonds remain a conundrum, to be sure, with long bond futures up about 12/32 at recent prices. I don't really "get" why investors would be willing to hold long bonds when money supply the world over is soaring, and commodity prices along with it. I also don't get why foreigners would be willing to keep loading up on our bonds given the pasting they're taking due to the dollar decline. I guess it's the whole "the credit markets are blowing up, so we want safety" trade writ large. But eventually, someone is going to have to pay the fiddler for all this money pumping. My two cents anyway.


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