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The Up and Down of the US$

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Someone else's opinion and I think it makes sense - it will be a battle between the market vs the vested interests and the power that be... who you gonna bet?

The US does not want confidence in the USD to collapse because it needs to run a budget deficit to compensate the loss of spending from the private sector. Lest the world forgets, it was the pullback in private sector spending from last yearís crisis that led to the world recession and shrinkage in world trade via a global shortage of USD liquidity. Last night, US officials indicated that during US Treasury Secretary Timothy Geithnerís visit to China, he will discuss how to boost China consumer spending and US consumer savings.

The message will be simple.Threatening the USD will critically undermine the hard fought efforts to stabilize the world from the crisis.

China wants a stable currency for trade and investment purposes. A lower USD would erode the value of its USD assets. On the other hand, a higher USD would lead to a higher trade-weighted exchange rate via currency depreciation in its major trading partners. A higher euro against yuan would also raise complaints from a restive Eurozone. China indicated a couple of days ago that it is tackling trade woes challenging its economy via a stable yuan and boosting trade finance.

Eurozone officials do not want euro to strengthen above 1.40 because appreciation would tighten monetary conditions and offset the hard-fought easing put in place by the ECB. On the other hand, they do not like euro falling below 1.25 either because it could stress Eastern Europe, which in turn, would put strain on western
European banks.

As for Japan, the unwelcome sharp yen appreciation from the unwinding of carry trades during the global crisis has led to economic hardships. All in all, America does not want a USD crisis, Japan does not want more JPY appreciation, and China and Eurozone want stable exchange rates. The only issue now is whether the market is listening.

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