REPRINT: Key Reasons Why the Euro is Heading to Par or Beyond against the US Dollar
The following is a reprint of the report we sent to our clients over a month ago. (This report is the second part of a report we published in June 2009 explaining why the major structural problems within the European Monetary Union could lead to a breakup. If you would like a copy of our original report, please request via email.)
Our longer term dollar call for a while now is simply this: The US dollar entered a multiyear bull market after bottoming in March 2008. If that proves correct, it is likely we will witness some major changes in correlations that seemed to be such layups during the US dollar 7-year bear market phase. Many of us just assume the recent past will be projected into the future. But maybe the less recent past is a better guidepost.
Among the notables is the situation in Euroland; Greece, of course, then the other PIIGS we’ve talked about so often. Turns out it’s even worse for Greece than originally imagined, and GDP could be hit even harder ... leading to more desperate measures.
But I’ll try to leave that euro stuff alone ... as I’m sure you could go get it anywhere today.
Milton Friedman said, "a central bank can control its exchange rate, it can control its interest rates, and it can control its money supply/inflation. But it can't control all three at the same time." Maybe we need to add an addendum: Too much emphasis on price stability will not allow a central bank to see asset bubbles coming at them from a mile away. China is doing a good job with inflation and its exchange rate, thanks to capital controls and its peg. But bubble-iscious it has become.
Gradually put in place a managed floating exchange rate system.
Apparently that’s what Chinese President Hu Jintao said in a speech at a BRIC summit last week. Smooth, huh?
It almost sounds as if maybe China wants to loosen the reins on the yuan; but it’s more likely China wants to loosen the pressure of the international collection of hands wringing its neck to let the yuan appreciate.
