The delicate dollar

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If the general political situation of the United States of America were good, a drop in the dollar based on "fundamentals", what is euphoniously known as a "adjustment", wouldn't be so bad, but with the political situation in the Middle East imploding the way it is, a sharp dollar fall could be read differently and lead to a general panic. There are lots of possible vicious circles and sinister synergies when things go very, very wrong in any situation and I don't think most people understand fully how bad things are now. To compare Iraq and Vietnam is very frivolous. Vietnam was stupid and tragic and part of the tragedy was how meaningless it was. But invading Iraq was both crossing the Rubicon and opening the very gates of hell. If the dollar comes to symbolize that, and it would be reasonable if it did, because it is a great symbol in itself, then its slide will burn a lot of people very badly. DS

Abstract from WSJ: The dollar's continued slide against the euro and British pound highlights the delicate task faced by Treasury Secretary Henry Paulson: allowing the U.S. currency to weaken slowly against other currencies without sending it into a plunge that would damage the nation's economy. Mr. Paulson has chosen to follow in the footsteps of his predecessor, John Snow, by acquiescing as markets pull the dollar lower. Yesterday, the dollar hit a 20-month low against the euro and a 14-year low against the pound. Over the past year, it has dropped 6.7% against a Federal Reserve index of seven major currencies.(...) Despite a call by French Finance Minister Thierry Breton for collective vigilance on the exchange-rate front, markets see little sign that global governments intend to intervene to arrest the dollar's slide. "To date there hasn't been any unified protest over the weakness of the dollar," says David Gilmore at Foreign Exchange Analytics, a consulting firm. "That is a green light to dollar sellers. Joseph Quinlan, chief market strategist at Bank of America Corp., says a weaker dollar wouldn't be welcome everywhere. "Such a move would undercut the primary source of growth of many nations: exports" to the U.S, he wrote in a recent report to clients. "The world just isn't ready for a weaker U.S. dollar." Seasonal factors may be contributing to dollar weakness, perhaps as European companies and investors sell dollars to repatriate profits. A research note from Barclays Capital says the dollar has fallen against the euro in the first two weeks of December every year since the euro's birth in 1999. READ IT ALL (subscription, sorry)