Dollar Devaluation

[Silvertip]

I rarely trade forex so forgive me for my lack of knowledge here. What would happen if the dollar was to be devalued ? If you are long GBP/USD and the dollar is devalued, what would happen to your position ? Would you gain from the devaluation ? How would your broker handle such a move ?

 

[Dispassionate]

I rarely trade forex so forgive me for my lack of knowledge here. What would happen if the dollar was to be devalued ? If you are long GBP/USD and the dollar is devalued, what would happen to your position ? Would you gain from the devaluation ? How would your broker handle such a move ?

The correct way to look at it imo is that interest rates are expected to go down in the US because growth is slowing. Interest rates in thy UK are expected to go up to prevent the economy is overheating. This means that GBP will face buying pressure to benefit from expected rate increases and that the dollar will be sold because it will devalue/you won't collect as much interest as rates go lower.

I've chosen to trade this crosspair GBPUSD because the pool of sterling is smaller than the other currencies and thus expect larger squeezes as people rush to buy sterling. I'm not keen on the EURUSD pair as I believe that there is a risk that the Euro will fail at some point in the future.

 

[Atilla]

The correct way to look at it imo is that interest rates are expected to go down in the US because growth is slowing. Interest rates in thy UK are expected to go up to prevent the economy is overheating. This means that GBP will face buying pressure to benefit from expected rate increases and that the dollar will be sold because it will devalue/you won't collect as much interest as rates go lower.

I've chosen to trade this crosspair GBPUSD because the pool of sterling is smaller than the other currencies and thus expect larger squeezes as people rush to buy sterling. I'm not keen on the EURUSD pair as I believe that there is a risk that the Euro will fail at some point in the future.

I would also add,

1. Balance of Payments defecit - in US & UK - long term
2. Budget Defecits in US & UK - long term
3. Price of Gold - China indicated in the summer it's moving away from the $. - Consideration

Interest rates - Inflation = Real rate of interest is perhaps the most important in the short term.

All things being equal will give you a good indication of where the $ headed. :arrowd:

 

[equtrader]

I would also add,

1. Balance of Payments defecit - in US & UK - long term
2. Budget Defecits in US & UK - long term
3. Price of Gold - China indicated in the summer it's moving away from the $. - Consideration

Interest rates - Inflation = Real rate of interest is perhaps the most important in the short term.

All things being equal will give you a good indication of where the $ headed. :arrowd:

It's a mistake to look at fundamentals for currency evaluation purposes. Everybody would be rich if fundamentals conveyed any valuable information for forecasting exchange rates. Currency exchange rates in G-7 are political decisions. Remember the Plaza and the Louvre Accord?

http://en.wikipedia.org/wiki/Plaza_accord

 

[Silvertip]

Granted the likelihood is virtually negligible, but it is an interesting thought nonetheless. Does anybody know how your broker would handle such an occurrence? I'm assuming if the dollar was to be devalued by 50% under the form of some international monetary crisis then you would quite simply double your money regardless of what currency you were trading the dollar short against? Is this correct?

 

[Atilla]

It's a mistake to look at fundamentals for currency evaluation purposes. Everybody would be rich if fundamentals conveyed any valuable information for forecasting exchange rates. Currency exchange rates in G-7 are political decisions. Remember the Plaza and the Louvre Accord?

http://en.wikipedia.org/wiki/Plaza_accord

I beg to differ. Fundamentals should always be part of your information store. General practice is to start from the long term and drill in to the short term - which ever time frame you prefer to trade.

You should know the figures and the stats involved in these important parameters to know direction. It is also important to understand the connections and relationships. That's economics for you.

I do agree in the short term you can buck the market as the Fed and international banks have been known to do.

Quoting from the article - "It is unlikely that such an arrangement would have succeeded in the long run, as the global economy is too large, heterogeneous, and fluid for even the most sophisticated central banks to effectively intervene." - In the long run the fundamentals rule.

All information is good informtion. You should be aware of it and choose to disregard it. The choice is ours. :|

 

[Silvertip]

World currency crisis (could be triggered by a number of reasons) > Dollar devalued > step forth the Euro as the world's reserve currency. Ofcourse this is quite elementary reasoning and is the most likely scenario should the US be the victim of these terrorists once again, or even some-kind of natural disaster that is large enough to destabilise currency markets.

Although I suppose the saving grace is that yellow and more importantly black gold are traded on the international markets with a dollar value, this is why the scenario is unlikely, however interesting nonetheless.

 

[barn_burner]

Granted the likelihood is virtually negligible, but it is an interesting thought nonetheless. Does anybody know how your broker would handle such an occurrence? I'm assuming if the dollar was to be devalued by 50% under the form of some international monetary crisis then you would quite simply double your money regardless of what currency you were trading the dollar short against? Is this correct?

Not sure what you mean by "how would your broker handle this"? The US Dollar gets weak, the GBPUSD goes up. If you are long, you make money. The broker doesn't have anything to do with that in the broader sense.

 

[equtrader]

Quoting from the article - "It is unlikely that such an arrangement would have succeeded in the long run, as the global economy is too large, heterogeneous, and fluid for even the most sophisticated central banks to effectively intervene." - In the long run the fundamentals rule. |

I agree when this regards just one central bank. But when there is a political decision at the G-7level and that many central banks are involved then I believe they can move currencies any way they like.

Some people make the mistake to think that the daily Fx volume of about USD 2 trillion represents real traded funds. That is not the case. Only a tiny fraction is real money exchanged from one currency to another and the rest is speculative intraday trading funds that cannot affect market direction. Traders do not have the power to move markets their way no matter what the intraday volume is.

Central banks tune the fundamentals any way they like in order to stir currency rates in the desired direction.

 

[Atilla]

I agree when this regards just one central bank. But when there is a political decision at the G-7level and that many central banks are involved then I believe they can move currencies any way they like.

Some people make the mistake to think that the daily Fx volume of about USD 2 trillion represents real traded funds. That is not the case. Only a tiny fraction is real money exchanged from one currency to another and the rest is speculative intraday trading funds that cannot affect market direction. Traders do not have the power to move markets their way no matter what the intraday volume is.

Central banks tune the fundamentals any way they like in order to stir currency rates in the desired direction.

And what happens if those countries lose faith in the Fed's credibility to deal with

1. BoP defecit - requires strong $ - rise in interest rates
2. Budget defecit - requires tax increases and reduced spending

What happens if those G7 countries have to raise their interest rates further impacting the $, causing them to lose value in their own reserves.

On black monday I think it was the Bundesbank who mentioned it was considering raising interest rates which kicked off the melt down.

What happens if China decides to move out of the $ and diversify into gold and foreign investment as it has started doing with investment in Latin America, Africa and in gold :!:

I would say $ has some more way to fall. In US the concensus seems to be reduced interest rates because of slowing economy. Here in the UK they are talking about raising rates. Look at the CAC and DAX. Recently even China raised interest rates to cool it's economy.

What do you think the foreign banks all of the G7 if you like - going to do to rig the $?

Any country that is not diversifying out of the $ today and buying gold will be sliding down a very slippery slope.

In summary the quote was in the short run yes they can fix the $. In the long run if fundamental problems are not dealt with markets will rule supreme :!:

Proof is in the $ touching £1=$2. ( long gone are the days of $1.50+/- )
Proof is in gold = $600+ ( long gone are the days of $450 )

Get the fundamentals right. Get on the right side of the trend. Play the markets.

 

[jacinto]

Any country that is not diversifying out of the $ today and buying gold will be sliding down a very slippery slope.

In summary the quote was in the short run yes they can fix the $. In the long run if fundamental problems are not dealt with markets will rule supreme :!:

Proof is in the $ touching £1=$2. ( long gone are the days of $1.50+/- )
Proof is in gold = $600+ ( long gone are the days of $450 )

Get the fundamentals right. Get on the right side of the trend. Play the markets.

Atilla,

to be fair, all economists are calling this the dollar decline and so on.

However, the buck is and will remain the world currency for the time being, and though it may fall, it will reverse at some point. there is a mass psychology issue at play. the euro is simply not a rival. it may be a temporary substitute, but that is all. the euro or the euro economy do not have what it takes to take over as the leading economy or currency so to speak.

we will see dollar strength next year when the real effects of how oil surpluses of oil producers are being invested, when the market starts to take bernanke for real, when the economy shows strengths the market is not seeing, and when euroland feels the pain of a strong euro.

having said that, any sound economical analysis would point to dollar decline :cheesy: .

you may ask, what is my bottomline with all the above.
answer is: i dont know. need to wait and see. for the time being, short the dollar with caution. :cheesy:

 

[Atilla]

Atilla,

to be fair, all economists are calling this the dollar decline and so on.

However, the buck is and will remain the world currency for the time being, and though it may fall, it will reverse at some point. there is a mass psychology issue at play. the euro is simply not a rival. it may be a temporary substitute, but that is all. the euro or the euro economy do not have what it takes to take over as the leading economy or currency so to speak.

we will see dollar strength next year when the real effects of how oil surpluses of oil producers are being invested, when the market starts to take bernanke for real, when the economy shows strengths the market is not seeing, and when euroland feels the pain of a strong euro.

having said that, any sound economical analysis would point to dollar decline :cheesy: .

you may ask, what is my bottomline with all the above.
answer is: i dont know. need to wait and see. for the time being, short the dollar with caution. :cheesy:

Valid points jacinto regarding there being no substitute for the $ and perhaps this is the fear which keeps the $ where it is.

I'm not sure why the oil producers should invest their money in the US or the $ if it's going to lose value though. I think money will flow where it's biggest returns are.

I don't dispute either that the US economy obviously being a superpower - big and strong can't recover from this weakness providing action by the Fed and US administration is taken.

But there are no fundamentals or facts that lead me to believe they are doing or likely to take that corrective action. I say this sincerely in that you give too much benefit of the doubt to the Fed. In my view they have already lost the credibility arguement by virtue of the Balance of Payments and Budget Defecit. I mention this so many times and nobody seems to notice. Without Tax and Interest rises $ will continue to sink.

Uncle Bush is not working for the US. He is working for Dick Chaney and the Halliburtons of America. Tax cuts, low interest rates. Billions on war and Pentagon contracts lots of slush unaccounted billions floating around the place. All markets talk about a A&M and bonuses. A&M do jack diddly dot for the economy. Where is this growth or productivity going to come from? A&M and bonuses will only contribute towards $ flight - leakages or falls call it what ever.
Moreover fancy easing SOX controls. They Bush administration makes the mafia look like the boy scout team.

$ will fall unless 1. interests rise 2. taxes rise 3. US productivity goes through the roof 4. US exports go through the roof. otherwise we are all in a pickle...

 

[Atilla]

Valid points jacinto regarding there being no substitute for the $ and perhaps this is the fear which keeps the $ where it is.

I'm not sure why the oil producers should invest their money in the US or the $ if it's going to lose value though. I think money will flow where it's biggest returns are.

I don't dispute either that the US economy obviously being a superpower - big and strong can't recover from this weakness providing action by the Fed and US administration is taken.

But there are no fundamentals or facts that lead me to believe they are doing or likely to take that corrective action. I say this sincerely in that you give too much benefit of the doubt to the Fed. In my view they have already lost the credibility arguement by virtue of the Balance of Payments and Budget Defecit. I mention this so many times and nobody seems to notice. Without Tax and Interest rises $ will continue to sink.

Uncle Bush is not working for the US. He is working for Dick Chaney and the Halliburtons of America. Tax cuts, low interest rates. Billions on war and Pentagon contracts lots of slush unaccounted billions floating around the place. All markets talk about a A&M and bonuses. A&M do jack diddly dot for the economy. Where is this growth or productivity going to come from? A&M and bonuses will only contribute towards $ flight - leakages or falls call it what ever.
Moreover fancy easing SOX controls. They Bush administration makes the mafia look like the boy scout team.

$ will fall unless 1. interests rise 2. taxes rise 3. US productivity goes through the roof 4. US exports go through the roof. otherwise we are all in a pickle...

1. Bloomberg have reported that Bank of Dubai have announced that they will be switching from the $ to the €

2. I've heard that Iran is also planning on setting up an oil exchange dealt in Euros.

Be interesting if 2 holds tight after embargos are placed on trade with Iran.

Surprised despite these hidden pieces of news and comments about a drop in interest rates the $ is holding up well.

Cracks are appearing. How long will the $ dam hold?

 

[jacinto]

Surprised despite these hidden pieces of news and comments about a drop in interest rates the $ is holding up well.

Cracks are appearing. How long will the $ dam hold?

Hi Atilla

I guess that the $ Dam (as you very well describe it) will hold, probably leak and fracture a bit, until the market comes back to the real issue.......that Euroland is the land of the inefficiencies and structural barriers to integration.

yes, single currency, apparent single market, but in detail, many fragmented markets that lack deregulation, with aging populations, and so on.

guess the above answers the question from a "longer term" approach......not the approach for a trader

j

Edit: I apologise, I am only thinking of euro, and euro currencies, and not dealing with your other comments.

regarding oil producers, I think that in most cases the real issue is not that the currency base for oil is the US$, but that their currencies are not "free" so to speak. A peg or fixed rate will only mean that they dont own their monetary policy. I guess their problem is the price of oil (for the time being), or that oil is priced in US.

If middle east oil producers ended up pushing for oil to be priced in euros, the same de facto fix would happen, but now only with euros and not bucks.... basic economics. This is called "the dutch disease", and if the currency floats, then it appreciates in oil bonanza. if it is fixed, you get inflation. As far as i know, middle eastern countries are not getting the point.

 

[Atilla]

Hi Atilla

I guess that the $ Dam (as you very well describe it) will hold, probably leak and fracture a bit, until the market comes back to the real issue.......that Euroland is the land of the inefficiencies and structural barriers to integration.

yes, single currency, apparent single market, but in detail, many fragmented markets that lack deregulation, with aging populations, and so on.

guess the above answers the question from a "longer term" approach......not the approach for a trader

j

The Euro is just one currency. Your points are valid. However, I would not under estimate it's strength or attraction when the $ starts to plummet. If you had to choose between £, €, Yuan or the Yen you haven't that much to choose in diversification.

Looking at Gold seems to be surging ahead once again. From past experience this usually comes about during periods of weakness in the $ and uncertainty in the markets. It's about to brake out of it's December trading range.

Talk of falling interest rates and inflationary pressures are not helping.

The next testing of the £1=$2 level will test those cracks.

Bank of Dubai is not the only one moving out of the $.

America lacks financial discipline; balanced budget, balanced BofP, a health policy, a foreign policy and increasingly the future doesn't look orange but pretty grey to me.

 

[Silvertip]

My intuitive faculties tell me something quite startling is just around the corner, whatever that is remains to be seen.

http://www.bloomberg.com/apps/news?pid=20601085&sid=a0fmorGjCwqo&refer=europe

 

[jacinto]

The Euro is just one currency. :

you are right, i apologise, as i only treated the euro.....guess i dont trade non european crosses :cheesy:

If today was, for example 2080, and all the forecasts of China were to become a reality, then i think there would be a real alternative for diversification. otherwise, it is rather limited as you well say.

I am not dollar bullish, dont get me wrong. i simply am long term yen and euro bearish, and as long as this is a story of dollar weakness, i think the market will "forget" about the real relative strength of the buck.

deeper comparative economic analysis will suggest that for the time being, the imbalances are against the buck........but it is still a more promising bet than the other two, and that those 2 currencies are being "used" as a buffer for a safe haven.

your points about gold i share 100%. I still see a big risk of stagflation, and IMHO there lies the price behaviour of gold relative to the buck (within the bigger picture of economic analysis and not trading or technical analysis).

regards

j

 

[Atilla]

you are right, i apologise, as i only treated the euro.....guess i dont trade non european crosses :cheesy:

If today was, for example 2080, and all the forecasts of China were to become a reality, then i think there would be a real alternative for diversification. otherwise, it is rather limited as you well say.

I am not dollar bullish, dont get me wrong. i simply am long term yen and euro bearish, and as long as this is a story of dollar weakness, i think the market will "forget" about the real relative strength of the buck.

deeper comparative economic analysis will suggest that for the time being, the imbalances are against the buck........but it is still a more promising bet than the other two, and that those 2 currencies are being "used" as a buffer for a safe haven.

your points about gold i share 100%. I still see a big risk of stagflation, and IMHO there lies the price behaviour of gold relative to the buck (within the bigger picture of economic analysis and not trading or technical analysis).

regards

j

Quite right jacinto, I don't trade on fundamentals. However, I do complement the trend with the news. If the fundamentals don't match the trend I like to ask questions and take a pause to re-evaluate.

SilverTips link makes the point so much better than I can.

My original arguement is what will sentiments be when the £1=$2 is tested very soon?

 

[Silvertip]

The Dollar is getting spanked again today... Not sure if this is just a knee-jerk reaction to the Bank of Dubai's statement or perhaps more indicative of an economy that is about to completely collapse. Either way, if the Bank of Dubai dont want the Dollar my behind would be nipping me like there is no tommorow if I were American at this present time. Imagine all those hungry consumers taking out mortgages in the last few months, doesn't bare thinking about. All that credit, all those foreign interest payments on bonds, all that money being spent on the war on terror, all that money being printed and its effect on inflation, no more M4 data... would make a canny chicken vindaloo if it were a curry.

 

[Atilla]

The Dollar is getting spanked again today... Not sure if this is just a knee-jerk reaction to the Bank of Dubai's statement or perhaps more indicative of an economy that is about to completely collapse. Either way, if the Bank of Dubai dont want the Dollar my behind would be nipping me like there is no tommorow if I were American at this present time. Imagine all those hungry consumers taking out mortgages in the last few months, doesn't bare thinking about. All that credit, all those foreign interest payments on bonds, all that money being spent on the war on terror, all that money being printed and its effect on inflation, no more M4 data... would make a canny chicken vindaloo if it were a curry.

It's not just the UAE but also lots of other banks too.

Gold has risen sharply too. It will be testing the 640 regions again very soon. Last time it came back down from there but interesting to watch. I'm long on both the GBPv$ & gold at the mo.