Re: Contemporary Geopolitics, again

At 10:52 AM 31/01/03 -0800, 
John Gulick <john_gulick@hotmail.com> wrote:

>... I'm not sure a "successful" U.S. invasion and 
>occupation of Iraq, as long as it has to be vetted by 
>other big powers, can keep the dollar from tumbling 
>significantly, too far for the likes of U.S. industrial 
>capital. Yes, a substantially weakened dollar means 
>more export revenues, but it also translates into less 
>market capitalization via overseas investors. ...

Bear in mind (1) the size of the US current account 
deficit, balanced by capital account inflows, and 
(2) that trade transactions are less than 10% of 
currency market transactions.

That is, currency markets are primarily *stock* 
markets, with funds 'in the market' moving around 
from one place to another, and only secondarily 
a *flow* market, where the funds pass through 
the market once and are gone.

Anyone who thinks that stock markets move gently 
and easily down to a new fundamental position 
just isn't paying any attention.  If the opinion 
develops that the dollar is moving substantially 
lower, then it will move fairly rapidly, and 
almost certainly overshoot whatever target is 
in mind.

Much of the 1990's was a kind of upside down 
Marshall plan, with the rest of the world 
financing their exports to the US via the 
financial capital inflows they were happy 
to send to the US ... because financial asset 
prices were strong ... but that means that 
there is a lot of exposure to the risk of a 
dollar downturn.  And what keeps people 
from panicking now?  They are not thinking 
of the dollar being near the top of its 
range, but near the middle.

Oddly, if you look at the Yen, the Pound OR 
the Australian dollar, their exchange rates 
from last January to this seem to be remarkably 
stable, and against that yardstick the dollar 
has gone down while the Euro has gone up.  
If the dollar slides any further, and sentiment 
among people holding mobile financial assets 
in US dollars shifts against the dollar, the 
move could be massive.

Of course, for protectionist sentiment, that 
is not a massive worry, since an undervalued 
currency acts as a barrier to imports.