Forex Discussions

Let's talk about the recent development on the forex market.

Rapidly Rising US dollar
Less than a month ago, EUR/USD was trading slightly below 1.5 and currently the EUR/USD pair is trading at 1.2579. A 16% decline in a matter of weeks. EUR/JPY is even more volatile, it declines more than 6% today! Spectacular move indeed.

Why is US dollar rising?
Commentators are saying this is because Europe and developing markets are facing the worst of this financial storm and is going to face a more severe recession. Another reason they suggest is that as the US federal reserve rate is already lying at 1.5%, so it cuts must be, to be assumed, lower than the rest of the world. These may have some truth but I think there are other more influencial reasons.

In a practical level, this can be explained by the US hedge funds manager and selling whatever they can to raise US dollar. In the early part of the year, they had earn good return investing overseas. Their collective decision is to choose the denial approach and buying into the believe that their country is somehow safer. They choose to safe face on their past decisions and "sell the winner" is the approach they take.

Let's look at the bigger picture. The world is deleveraging. The central banks are printing money. As money supply increases, price of money goes down and interest rate goes up, however, central banks had just make a united move to cut rate. Smell fishy, doesn't it? Economic science tells us no matter what they do, interest rate must go up.

USD going up is just the prelude.
As the central banks prints money, their existing creditors wouldn't be happy. They don't want to get paid with the new paper coming out of the printer. Print money in itself reduce the real of money. It is a partial default act. So how to make your creditor to accept the printer money? It would be nice if you have a gun on his head right?

Economy will find a way as water will find a crack
Now we are seeing the start of central bank collapses (Iceland, Hungary, Argentina, Pakastine). Several other currency are falling agressively vs USD forcing them to raise rate, like Denmark and Hungary (Denmark hikes lending rate to defend currency). Hyperinflation is already starting in those countries and this is going to intensify and spread to other bigger countries. This will effectively kill US export industry and forcing US to lend more to finance itself. Tax revenue will dry up as corporate America loses money and unemployment stack up. Think the national debt is big now, think again. It is going to accelerate, double itself every few months, until it is no longer sustainable and then......hyperinflation. Different route, same result. That's the beauty of economics.

So long. Dow future is falling 400+ points off the fair value, FTSE is off 7%+ and DAX is off 9%+. It is going to be interesting. Till next time.