I see the rise of the USD as only temporary, since for now I foresee the strength of the USD limited to the middle of December. I expect the Polish economy, by and large, to remain unaffected as long as some bank does not collapse. Stock markets do not, of late, represent the complete economy and hence a drop in the stock market cannot be considered as measure of the full health of the economy.
So far, the financial crisis is well contained but not over. The US economy is faced with two main challenges: debt and availability of credit, which are quite manageable, but we need to wait and see the new president’s initiatives.
In the last few days, we have seen a spectacular rise in the value of the USD. Though, I did expect a technical correction in the value of the dollar, as indicated in my reports earlier, I did not expect it to get so strong so fast.
In my opinion, sustainable things happen slowly. Therefore, if the USD is gaining ground so fast it is likely that at some level speculators will decide to switch to other assets, such as the Yen, CHF, Euro, Gold, Silver, Platinum etc.
Most world central banks hold several billion USD. It makes sense to have a strong USD because it allows these central banks the opportunity to get out of the USD. Just like it was not a very sensible idea to buy Euro/USD at 1.6, so likewise it won’t be a great idea to sell euro/USD at say 1.1 or say 1 in the case when the USD becomes so strong.
The USD tends to further gain during times of crisis. If the doomsters are correct in what they are saying that you can never really gauge human psychology, and however a good economist you are it would be safe to bet that at some stage holders of large amounts of USD would decide to play safe and get out of some of their USD holdings. If various Asian Central banks decide to shift even 10 percent of their reserves to other assets, that would be a massive amount of USD.
One of the market Axioms is that the market always repeats itself. However, the response of the government and the market players is never exactly the same. Each set of players draws on the earlier experience and is well prepared to take care of the problem at hand. Problems have a nasty habit of behaving unexpectedly. Had we been so clairvoyant we would not have a financial crisis in the first place, hence it would be safe to assume that some things might happen in a way that will take the FED as well as financial pundits by surprise.
The US needs a weak USD to boost domestic production. At the same time, the US needs a strong USD to keep up confidence in the USD as reserve currency. A strange balance indeed.
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