WHO'S BRINGING WARREN BUFFET HIS MEALS-ON-WHEELS?:

The Almighty Dollar is Back: Now there is likely to be a totally different currency model—a world dominated by the dollar in ways not seen since the early 1950s. (Jeffrey E. Garten, 6/27/05, Newsweek International)

Until a few weeks ago, the dollar bull was a rare animal. Most currency watchers thought the dollar was in long-term decline, due to rising U.S. trade and budget deficits. The only question the majority seriously entertained was whether the decline could become a crash, if foreign financiers began to tire of supporting U.S. borrowing, and did so in a stampede.

Yet since January the dollar has risen 12 percent against the euro, and 7 percent against the yen. A growing number of dollar bears are turning bullish, and I'm one of them. This may be the start of something big. For three reasons, we may be seeing a fundamental shift with enormous implications for the United States and the world.

First, for global investors looking for long-term value and security, there is now no real alternative to the dollar. The euro used to be the key option, but after the recent French and Dutch vetoes of the proposed constitution for the European Union, there is talk among financial officials that the agreements that underlie the euro itself may be shaky. Neither the Japanese yen nor the Chinese renminbi is even close to being a major alternative to the dollar. The truth about these Asian giants is that their stock and bond markets are too weak to attract major funds from around the world.

Second, France, Germany and Italy have been stuck for years with anemic growth and double-digit unemployment. They have demonstrated no political will to restructure their economies for global competition, and there is a good chance that the European Central Bank will be strong-armed into lowering interest rates. This could occur at the same time as the U.S. Fed continues to increase American rates. The differential will make America much more attractive to foreign lenders.

Third, Asian governments are unlikely to give up their mercantilist policies, which rely on cheap currencies to stimulate exports. Asians use their enormous savings, denominated in their own currencies, to buy dollars. This drives down the value of the yen and the won, and holds up the greenback. They accumulate billions of dollars, which they then lend to the United States so Americans can buy Asian exports. It's increasingly clear that Asian lenders—particularly central banks that now account for about 70 percent of foreign loans to the United States—don't seem to mind holding U.S. debt as long as the American economy is expanding, which seems likely for the foreseeable future.

Nothing has changed but their perceptions.

MORE:
Sweden cuts rates as economic growth falters (Rupini Bergström, June 21 2005, Financial Times)

Sweden's central bank on Tuesday cut its key interest rate to a national record low of 1.50 per cent, the first reduction within a major European country in the face of faltering economic growth.

The bank also slashed its 2005 economic growth forecast to 1.9 per cent from a 3.2 per cent and said it expected Swedish consumer prices to rise 0.3 per cent this year instead of the 0.1 per cent rise it had previously predicted.

While the Sveriges Riksbank's decision to cut rates had been well anticipated, many were surprised by the size of the move. Known for its gradualist policy, the Riksbank has only infrequently made 50-basis-point cuts to the cost of borrowing, preferring to move in steps half that size.

Posted by Orrin Judd at June 21, 2005 3:47 PM