Tags: hans | parisis | Dollar | Global | Uncertainty | japan | euro

Dollar Stands Firm, for now, Amid Global Uncertainty

Monday, 21 March 2011 04:55 PM Current | Bio | Archive

Secretary-General of the Arab League, Amr Moussa, said yesterday: “What is happening in Libya differs from the aim of imposing a no-fly zone, and what we want is the protection of civilians and not the bombardment of more civilians.”

He also said that he is calling for an emergency Arab League meeting to discuss the situation in the Arab world and particularly Libya.

Also noteworthy is what the Chinese People's Daily (that newspaper is an organ of the Central Committee of the Communist Party of China) said about the situation in Libya: “The military attacks on Libya are following on the Afghan and Iraq wars, the third time that some countries have launched armed action against sovereign countries … It should be seen that every time military means are used to address crises, that is a blow to the United Nations Charter and the rules of international relations.”

Interestingly, Reuters notes the commentary appears under the name of “Zhong Sheng,” a pen name that in Chinese sounds like “Voice of the Center,” suggesting that it is voicing “top-level government opinion.”

Since there is a no-fly zone imposed over Libya, we could ask ourselves what might impact the currency markets in particular in the days, weeks and even months ahead.

While for now the Swiss franc comes out as the strongest of all, it is difficult to nail down any definitive conclusion(s) about how the markets, and more specifically how the U.S. dollar, will react to the North African conflict.

Investors should keep in mind that an oil-price shock shouldn’t necessarily be a dollar negative. Of course, evidence from 1973 and early 1974 during the Yom Kippur war and the following oil embargo indicates that investors “only” choose the dollar as a “safe haven” during the height of the crisis.

Also, we have learned from past impositions of no-fly zones that these events don’t necessarily feed through into dollar weakness either. No-fly zones may not lead to any specific resolution of the situation on the ground. Remember the period of the Iraqi no-fly zones when the dollar performed surprisingly well?

Also, when we noticed absence of direct U.S. military involvement, the dollar also has tended to stabilize or even gain ground. In contrast, the risk that the U.S. will need to become involved militarily on the ground, as is now the case in Libya, has usually (but not always) been a fairly direct dollar negative.

It has been only when the U.S. did become fully involved militarily in a “decisive” move to ensure “military” victory that we have noticed a stronger dollar. So, it’s clear we are only at the early stages of the Libya war, and that’s a dollar negative.

Yes, the developing situation in Libya is becoming far too complicated for having the slightest idea of what the final outcome could, or could not, be.

No doubt, there are a lot of “unknown unknowns,” in Libya and the whole undertaking could (let’s hope not) become a quagmire for the West and the U.S., which has now officially entered its third war.

Yes, Libya is close to a situation tantamount to civil war, with forces loyal to Libyan leader Moammar Gadhafi in the west opposed by “rebels” from the east. Don’t forget, one of the biggest problems faced by the Western alliance has been, and will continue to be for some time to come, “identifying exactly” who the rebels are.

On the other side of the Atlantic, it becomes clearer by the day that the eurozone debt crisis will unlikely be rated in history as a masterpiece.

Eurozone finance ministers will try to get closer to an agreement on the capital structure of the European Stability Mechanism, ahead of this week’s European Council. Interestingly yesterday, the Irish Agriculture Minister Simon Coveney said that Taoiseach Enda Kenny, the new Prime Minister of Ireland, will announce a new burden-sharing plan for bank bondholders at Thursday’s EU summit in Brussels. When asked what would happen with the bondholders, Mr. Coveney said: “They will be asked to take a portion of the debt – in other words, that they would take a discount on their senior bonds.”

When asked specifically if this would mean “burning the bondholders,” he replied: “You can call it what you want but it’s called essentially burden-sharing.” He also reiterated Ireland’s refusal to increase its corporate tax base. Conflict is brewing in Brussels…

Also, Otmar Issing, actual adviser for Goldman Sachs and former member of the board of the Deutsche Bundesbank (1990–1998) and of the Executive Board of the European Central Bank (1998–2006), severely criticized in an interview with the German newspaper Der Spiegel the likely outcome of this week’s EU summit on the euro governance reform and rescue rules for troubled euro member states.

He warns of “potential transfers, for which there will be practically no limits to the top.”

He warns: “If we go down this route permanently we will get a hostile attitude towards Europe in the German population of which I am very much afraid.” I think long-term investors should take notice of his warning.

And finally, the value of the Japanese yen steeply rose against the U.S. dollar and other major currencies. It is believed that speculative investors bought the yen thinking that Japanese insurers and exporters would dispose of overseas assets and convert them into yen to pay costs of the March 11 earthquake and tsunami.

Instead, at least for now and also after the massive intervention, the reverse happened. Investors should not forget that a steep rise in the value of the yen will inevitably weaken the competitiveness of Japanese exporters; contribute to the hollowing out of Japanese industries and cost employment opportunities in Japan.

Rebuilding is one thing, but that alone won’t do the trick for a Japanese recovery. The disaster not only affected production activities in the quake region but also hampered product distribution that has further complicated the situation for Japanese manufacturers that are facing fierce competition from manufacturers of emerging economies.

It’s a fact that Japanese carmakers and electronics makers were already, before the earthquake, trying to move their production bases overseas and a strong yen will accelerate this move.

Midsize and small enterprises that don’t have overseas factories will be forced to cut back on production, which will lead to higher unemployment. I wouldn’t buy Japan just yet, instead I’m just watching how it furthers develops.

For now, I still believe in gold, oil, natural gas, Canadian dollars and in a contrarian view for the moment, I’m not afraid of holding the U.S. dollar. No doubt the U.S. dollar could fall further, but in my opinion, there are way too many pessimists on the U.S. dollar. Last Friday, we saw only 5 percent “bulls” on the dollar.

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Secretary-General of the Arab League, Amr Moussa, said yesterday: What is happening in Libya differs from the aim of imposing a no-fly zone, and what we want is the protection of civilians and not the bombardment of more civilians. He also said that he is calling for an...
Monday, 21 March 2011 04:55 PM
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