A DARK CAVE. IN THE MIDDLE KINGDOM A CAULDRON BOILING:

Daily Forex Commentary (Jack Crooks, 2/16/05, Asia Times)

I often receive email questioning why I am bullish on the dollar over the intermediate-term time frame. I provide the usual rationales to fit my story:

• Positive US yield differential.

• Strong "relative" US economic growth.

• Plenty of dollar bearishness still in the market.

• Action "at the margin" by the Bush administration on the budget deficit problem.

• A realization that the a falling dollar is not the key to balancing the US current account.

But in the background I keep watching for what I believe is the catalyst that will lead to another strong leg-up in the dollar. And this catalyst is linked tightly with the level of "hawkishness" Mr Greenspan displays going forward - the China Bubble. And though China is the darling of the investment elite, make no mistake, it is a bubble.

We all know that bubbles end badly - we just don’t know when. But as Mr Greenspan tightens down the monetary screws, we inch closer and closer to fate! Should fate prevail, a whole bunch of money will come rushing back onto the shores of good old Uncle Sam, providing a tidy little boost for the buck.

"China, appears to be experiencing the biggest liquidity bubble in its history. The hot money inflow totaled US$656 billion in 2003-04, which has made money cheaper in Asia than in the US. The hot money turns into demand, primarily through property speculation.

"I believe this global liquidity bubble, with China at its heart and property and hedge funds as its two lungs, will burst if: 1) the Fed raises interest rate quickly; 2) overcapacity overwhelms speculative demand, or 3) a financial accident occurs that decreases risk appetite," said Andy Xie of Morgan Stanley

Thank you Mr. Xie! Another brilliant summation.

This is the reason the Chinese have put "revaluation" on hold. Despite the growing consensus belief that a soft-landing is assured, China is still mired in Bubblesville.

The problem is less that China can not be sustained as is, but that the question of what stops the crumbling once it begins.

Posted by Orrin Judd at February 16, 2005 6:00 AM