Sunday, 7 December 2008
The most plausible explanation cited for the very sharp turnaround of the US dollar's fortunes in the last couple of months has been the "repatriation" effect. Namely as the world's reserve currency a lot of companies across the world; be they hedge funds or consumers goods giants; have their base currency and therefore debt denominated primarily in US dollars. As credit lines have been cut by banks these companies have been forced to repay maturing debt and raise cash for the continued functioning of their businesses through the fireselling of assets. Many of these assets are in a local currency (not USD). Therefore after selling the assets the local currency is then sold for US dollars. Hence the move in Euro$ from1.60 to 1.27 and Sterling$ from 2 to 1.46 in a matter of weeks, The massive deleveraging therefore translates to a massive spike in the demand for dollars, flying in the face of the massive military spending, massive budget and trade deficits and the now massive printing of US dollars. As soon as the deleveraging ends, as it must at some point, the demand for low yielding highly supplied US dollars should fall off a cliff. With it so will the price of US dollars. Gravity will prevail.