DEMAND AND SUPPLY

Number of posts : 440 Registration date : 2007-07-01

DEMAND AND SUPPLY

By BOO CHANCO

Since
2001 the dollar has lost more than half its value against the euro. It
now costs nearly $1.40 to buy one euro. And it isn’t just the euro that
seems to be growing stronger against the US dollar. It has declined
against many other major world currencies, and even including minor
ones like our peso, reflecting the dollar’s loss of purchasing power.

The Philippine
Star

There is this joke circulating in financial
circles that the once “almighty US dollar,” is fast turning into the “new
American peso.” Since 2001 the dollar has lost more than half its value against
the euro. It now costs nearly $1.40 to buy one euro. And it isn’t just the euro
that seems to be growing stronger against the US dollar. It has declined
against many other major world currencies, and even including minor ones like
our peso, reflecting the dollar’s loss of purchasing power.

As the Los Angeles Times reported, “in much
of the world — from Brazil
to Poland to Thailand — one dollar buys less than it did a year
ago, and far less than it did four years ago. On Friday, the US currency hit
a 30-year low against its Canadian peer.”

There isn’t a single explanation for why
currencies rise and fall, the LA Times explains, but many experts believe that
the sliding dollar is largely a function of the nation’s borrowing binge of the
last two decades. That has left the US with a yawning trade deficit and
the fact that it is deep in debt to foreigners.

Alan Greenspan, the former chairman of the US
Federal Reserve, blames President George W. Bush for America’s current economic
problems. Greenspan says Bush pays too little attention to financial
discipline. In a book to be published this week, In The Age of Turbulence:
Adventures in a New World, Mr. Greenspan says Mr. Bush ignored his advice to
veto “out-of-control” bills that sent the US deeper into deficit.

In theory, a currency is supposed to reflect
to some extent, the underlying health of the economy that stands behind it.
“The basic thing is, we have been living beyond our means,” Ted Truman, a
senior fellow at the Peterson Institute for International Economics in Washington told the LA Times.

A dwindling dollar is, in effect, the
market’s attempt to slow those trends, Truman said. The flip side of a weak
dollar is that it makes US goods less expensive for foreign buyers. America
shipped a record $137.7 billion worth of goods and services abroad in July, 15
percent more than in July 2006, government data show. That’s good news for
American exporters.

But even then, Americans still bought more
from the rest of the world — including foreign oil — than they sold or
exported. Imports reached $196.9 billion in July, up five percent from a year
earlier.

The gap between imports and exports is the
trade deficit. The broadest measure of a nation’s trade picture is the
so-called current account, which includes investment flows. The deficit in the
current account for the US reached a record $811 billion last year, more than
twice what it was as recently as 2001.

The LA Times reports that “this year the
deficit has been shrinking modestly, helped by the surge in exports. But the
gap remains massive — another reason, many economists say, that the dollar is
likely to keep falling in value… Some believe, however, that the trend could
speed up.”

That’s bad for the world economy too. “If the
dollar loses value too quickly, it could wreak havoc on the economy and
financial markets — driving up interest rates and inflation and slashing
Americans’ purchasing power, said Peter Schiff, who heads money management firm
Euro Pacific Capital.”

The danger, the LA Times warns, is that a Fed
rate cut could spark a much faster downward spiral in the currency. “That could
occur if lower interest rates on dollar-denominated bonds caused foreign
investors to balk at buying more, or encouraged them to sell US securities and
invest their money elsewhere in the world. Worse, wholesale flight of foreign money
from US bonds could drive up long-term interest rates if the Treasury and other
debtors have to pay more to attract investors to their securities.”

No wonder John Gokongwei, the chairman
emeritus of JG Summit told us over dinner in Shanghai last week, he is worried about rough times
ahead. He is worried about the view expressed by US Treasury Secretary Hank
Paulson that the ongoing subprime mortgage crisis is going to be worse than
three of the worst things that ever happened to the global financial system —
the Asian crisis of 1997, the $50-billion Mexican meltdown of 1994-95 and the
$40-billion Russian default of 1998.

A US recession, Mr. John said, could nip in
the bud the boom in the Philippine real estate market. We could end up with a
lot of unfinished superstructures of skyscraping condos. Pinoy expats who are
fueling all those grand condominium projects will be adversely affected by the
US credit crunch. Mr. John said that under US laws, they have the right to ask
for the return of deposits they made on local condo units sold to them in
America.

Mr. John’s advice: stay liquid and borrow
long term.

Number of posts : 440 Registration date : 2007-07-01

(I-Newswire) - Last week the Euro hit an all time high against the US
dollar after speculation intensified that the FOMC ( US equivalent of
the bank of England ) will cut rates to ease the credit crunch which
has plagued the equity markets and lending institution world wide. The
USD also lost against other currencies, slipping against both the pound
and the yen, but the main action was with the Euro says
Betonmarkets.com's Michael Wright.

There are implications from
this; the Euro's strength threatens to make European exports more
expensive, and therefore less competitive. However, the impact so far
hasn't been too dramatic due to the currency's movement this year being
gradual rather than abrupt.

The weakening dollar conversely
makes U.S. exports more competitive, which is good news for American
manufacturers but means rising prices for imports to the U.S. The
dollar's decline also diminishes the spending power of American
tourists in Europe, while attracting to the U.S. visitors from Europe
seeking cheaper accommodation and shopping.

The dollar, which
has hovered within a few cents of its record low over recent weeks, had
come under new pressure since the U.S. Labour Department issued
unexpectedly poor August jobs data. That report strengthened
speculation that the Fed will cut interest rates at its September 18th
meeting by as much as half a percentage point. A cut from the current
rate, 5.25 percent, would be the first reduction in four years.

Lower
interest rates, used to jump-start the economy, can weaken a currency
by giving investors lower returns on investments denominated in the
currency. The European Central Bank last week put its own two-year run
of gradual interest rate rises on hold but left many economists still
expecting a quarter-point increase from the current 4 percent before
the end of the year.

With the countries seemingly going in
opposite directions with their interest rates, and economies, it means
that there could be further gains for the European currency. The key to
this will be in the wording from the FOMC, if the statement is dovish
it could open up the possibility of an appreciation in the euro by as
much as 3 cents.

With Betonmarkets.com you can take advantage of
this potential situation by buying a "no touch" trade on the EUR/ USD.
This compensates you if the currency doesn't touch a certain
predetermined level for the duration of the trade. A no touch option
with a 25 day duration and 400 "pips" or 0.04 Euros below the current
spot price, returns 10% ROI. This means you win if the Euro continues
to rise against the dollar or doesn't dip too severely.

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