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Japanese Perspective On The Dollar And 1987 Re-visited

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Editorial/ Fed rate hike


This week's decision by the Federal Reserve Board to once again nudge U.S. interest rates higher triggered a dollar sell-off on the foreign exchange market, with the yen momentarily climbing to its highest value against the U.S. unit in eight months.
Current dollar selling by investors reflects heightened anticipation that this particular hike in the Federal funds rate will be followed by a pause in the current credit tightening cycle. The Fed has now carried out a series of 16 consecutive quarter-point increases since June 2004. The Fed noted a cooling in the U.S. housing market, which had appeared to be overheating, while hinting it may halt further rate hikes if economic growth looks like it is slowing. With a swelling U.S. trade deficit, pressure had been mounting to unload dollars. Yet, the market for greenbacks continued to enjoy support from high interest rates versus those of the euro or yen.
But with projections for rate hikes by both the European Central Bank and the Bank of Japan, allowing short-term rates to remain as they are would sap the appeal of putting money into dollars. Basically, this stems from the judgment that such a market tone would accelerate the shift to move assets into euro or yen holdings.
This brings to mind
"Black Monday," the October 1987
New York stock market crash that threw global financial markets into chaos. At that time, too, Washington was running steep "twin deficits" of trade and budget. Against such a backdrop, leaders of the former West Germany rushed to hike rates. Then, with moves suggesting Japan would follow suit, anxiety spread to the U.S. economy.
Just prior to that market plunge, long-serving Fed Chairman Paul Volcker was replaced by Alan Greenspan. The ensuing drop in confidence in the little-known Greenspan as the incoming "market caretaker" also helped push down the market. Compared to that page in financial history, today's global economy enjoys a far more sturdy foundation. But once again, the timing is eerily familiar. New Fed chairman Ben Bernanke took over from the retiring Greenspan on Feb. 1.
Thus, the scenario of U.S. rates coming down a rung, paired with keen attention to the rate moves by Japan and Europe, inevitably conjures up images of the market nightmare 19 years ago.
Clearly, it would be risky to neglect the global imbalance of expanding U.S. deficits on one hand, and a steady accumulation of surpluses primarily in the coffers of China and other emerging Asian nations on the other.
Failure by the major powers to take action on correcting this disparity could very well lead to chaos on the forex, stock, bond and other financial markets.
There are calls within the United States to engineer a system of U.S.-Japan-Euro cooperation along the lines of the Plaza Accord of 1985--the agreement that effectively corrected the strong dollar at the time.
But today, with China and other powers wielding such solid clout, there are few hopes that such an effort would bear fruit.
The only feasible choice is for each country to come to grips with its own respective economic issues, while consigning the matter of exchange rates to the process of natural market adjustment.
In more specific terms, the black ink nations of Asia should overhaul their dependence on exports and promote domestic demand, while implementing reforms that allow exchange rates to more closely mirror the market. Japan and Europe, meanwhile, must continue to be vigilant about growth, and press forward with structural reform. But most urgent and important of all, Washington must trim its twin deficits.
What the market dreads, in particular, is expanding expenditures for waging war in Iraq, and the direction of the tax-cutting scheme that remains a virtual campaign pledge of the Bush administration. Both of these courses are culprits destined to further undermine fiscal health. In moving to correct this situation, Bush needs to convey a clear message to the world that will allay market fears.
--The Asahi Shimbun, May 12 (IHT/Asahi: May 13,2006)

Had the UN (including Japan who bailed early) acted on its threats to Iraq following their invasion of Kuwait and threatened take-over of Saudi, rather than leave the work to the UK and the US, the additional pressure might have saved Iraq from a Sunni vs. Shia freefight. Divide and conquer works too easily where the UN is concerned and their directives no longer have credibility.

That said, the above article seems to be right on the mark in its analysis. The black ink economies do share in the responsibility to correct imbalances by exporting less and consuming more internally. Draining the US and the EU and creating imbalances has negative implications for everyone as Japan has found out with years of stagflation. Now we have China to deal with and, as the writer suggests, they are not too interested in anything other than themselves.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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