Currency fundamentals

[echo13]

Hey everyone!

For the past few months,we've seen the swiss franc skyrocket to new highs against many currencies. I understand that this increase in demand for the franc is because it is deemed 'safe',something people seek in times of turmoil and uncertainty like this.

But what i do not understand is,why are the other currencies seen as 'unsafe' in the current economic situation? Is there a possibility that the US$1 a person holds today become zero the next? Does a recession in the US alone (although this is nearly impossible) depreciate the dollar? If so,why?

And sorry for asking so many questions at one go. The urge for knowledge brought up by curiosity is truly a magnificent force

 

[wackypete2]

Yes, the franc is supposedly "safe", or at least safer than others. Most of the move is just fear and panic from nervous fund managers and traders and everyone else jumping on the trend.
You can go much deeper into economics and politics but this is just the basics.

Peter

 

[echo13]

Most of the move is just fear and panic from nervous fund managers and traders and everyone else jumping on the trend.

What are they fearing? Does poor US economy affect the strength of the dollar?

 

[jthetrader]

The move to the Franc is a psychological move, I don't know whether it is backed up by fundamentals at all. In the 1970s Franc-denominated accounts had negative interest rates on them (i.e. you paid a percentage of your money to the bank for the privelege/safety of having Francs). Today the same thing is going on, but the premium comes when you are buying the Francs themselves (what's the difference between paying $1.25 for a Franc and receiving a nominal interest rate on it and paying $1.10 and losing a percentage of them each year?).

Francs are like gold in a way. A lot of ways actually, they are both backed up by belief.

What I wanna know is how high can the Franc go? Par with the £? Or at least with the €? $1.50 to CHF?

 

[jthetrader]

What are they fearing? Does poor US economy affect the strength of the dollar?

Yes. I only understand the basics so I can only explain in terms of basics but here goes:

1) Nobody wants the dollar if they think it won't be worth anything in the future
2) Nobody wants dollar denominated securites if the resulant cash flow from them (i.e. dividends and interest) are worth nothing due to the depreciation of the dollar in the intervening time; i.e. you take your £ and buy $ and with the $ you buy American stocks, the stocks may even appreciate but if the $ has fallen in value then you would be better off having just kept your £
3) The American economy is in a state of distress, nobody can really envision a painless way out. So the game people are playing is, "Do I sell now or will things improve a little"? More importantly, aside from speculators, I don't think anyone is buying in the US. More sellers than buyers= reduction in price.

 

[echo13]

1) Nobody wants the dollar if they think it won't be worth anything in the future

But why won't the $ be worth anything? How will the value of the $ decrease due to poor US economy?

 

[dannyrussell53]

But why won't the $ be worth anything? How will the value of the $ decrease due to poor US economy?

It has a lot to do with the central banks around the world and debt.
Bernake firmly believes (imo) that the only way out of this slow economy and ballooning debt is inflation. He loves easy money.

Trichet at the ECB isn't exactly the same (the ECB raised rates in July I believe). The problem with Europe is since so many contracts are tied to inflation, inflation begets more inflation.

Also the reason the economies are slow is mass de-leveraging. I see a risk on risk off trade for the foreseable future.

Thats why I think im going to go long USD/CAD. Still deciding on that tho.

You also have to think about the financial sector and the European crisis. How do you think Trichet will solve the problem? Will it be Eurobonds or bust?

IMO Merkel will use the carrot and stick to get the periphery to agree to austerity. The dissolution of the Eurozone is I think unlikely.

From my short time trading forex i've noticed fundamentals are really all about politics and central banks. Lots of rumors that go around though so be careful.

Hope this was helpful.

 

[Camus]

Hello

I have a question which perhaps someone can answer and is a bit relevant.

Does the USD depreciate as a result of natural disasters?

I for example bet the EURO/USD would not touch a certain level before today.
However with the hurricane and recent earthquake I question if this will negatively impact the us economy and devalue the dollar with respect to a stable economy where there haven t been any natural disasters.

 

[enragedcow]

But why won't the $ be worth anything? How will the value of the $ decrease due to poor US economy?

it's not that it won't be worth anything. here's an incredibly simplified version:

imagine 2 countries, the US and the rest of the world, there is no one else. and we'll start at an initial stage where the US is growing at some positive rate. then, this happens.

OMG ECONOMIC SLOWDOWN THAT IS EXOGENOUS!!!!

now, the US economy is growing at a slower rate or even shrinking.

since the US GDP is decreasing the amount of transactions people in the US are making decreases this will decrease the demand for money and assuming the money market wants to be in equilibrium the price of money (interest rate) will decrease

overseas investors (the rest of the world) see this decrease in interest rates and choose to sell their US denominated assets increasing the supply of USD which pushes down the price of the USD a depreciation.

very simplified, no account of risk or expectations

risk increases - currency depreciates as USD denominated assets are sold
expectations about future currency prices change - currency changes