An Overbought dollar lurches even higher

This is from the Guardian(UK)
This article gives some of the reasons why the US dollar is high just now especially in relationship to many other currencies. However, given the huge increase in debt and the slumping US economy I would expect that there will be a decline in time. It seems as if there could be a US dollar bubble which will burst in the future.




An overbought dollar lurches even higher
Reuters
, Thursday October 23 2008
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 23 (Reuters) - A brutal global crisis has prompted investors around the world to dump their own currencies and seek shelter in the U.S. dollar, a trend many analysts see will carry on for some time.
The dollar has gained about 12 percent against the euro since the year began. It is on track for its best month versus the single currency since its launch in 1999.
The greenback has also surged against high yielders such as the Australian and New Zealand dollars, rising roughly 25 percent. It has punished emerging market currencies as well, once the darlings of the investing world because of their current account surpluses and competitive interest yields.
It's less about the United States and the dollar being a safe haven, some analysts say. After all, the storm started in this port, starting with the subprime credit crisis that erupted in the summer of 2007 as U.S. house prices fell.
Global deleveraging has been the culprit. Investors had used borrowed funds to increase their portfolio bets in recent years. These borrowings are now being called in by lenders and if the debt was priced in the U.S. currency -- and most of them were -- the result is a short squeeze, a scramble to find dollars to repay those loans.
"Foreign-exchange movements reflect major unwinding of positions and the need to cover losses on other dollar assets," said Avery Shenfeld, senior economist at CIBC World Markets in Toronto.
"The dollar could become significantly overvalued during this turmoil and there is nothing that could prevent the U.S. dollar from getting to $1.20 against the euro," he added.
EVEN 'PERMA BEARS' MAY CAVE
Still, technical indicators are suggesting that the U.S. dollar's blistering rally may have to take a breather soon, given how far it has advanced over the last three months.
According to the charts, the euro has been oversold across short and longer time frames. A technically overbought dollar tilts toward even more overbought territory.
"This is a dangerous game at the moment for a technical trader who may rely on oscillators, so be careful out there and keep your stops tight," said Jack Crooks, president of currency investment adviser Black Swan Capital in Palm City, Florida.
Crooks noted, however, that the dollar index is also at a level "where we just might get what we refer to as major capitulation to the trend by the perma bears."
He sees resistance at 87.30 in the dollar index. On Thursday, the ICE Futures dollar index was at 85.231 just before 4 p.m. in New York, after hitting a fresh two-year high at 86.120.
EURO-ZONE WOES
One of the most bearish forecasts on the euro came from BNP Paribas, which predicted a print of $1.13 by the first quarter of 2010. On Thursday, it traded below $1.28.
The euro has fallen more than 20 percent against the dollar since the single currency hit a a record high above $1.60 in mid-July.
And it's easy to see why.
In the past month, several European banks had to be bailed out, emphasizing the global nature of the credit crisis.
Economists also believe that unprecedented efforts by central banks and governments to shore up the global financial system, including some of Europe's biggest houses, will not be enough to prevent the euro zone from sliding into recession.
"The weakening of the European economy and by extension, the eastern and central European bloc has weighed on the euro. It's not looking very good at the moment," said Sebastien Galy, a currency strategist at BNP Paribas in New York.
He added that there's little hope for an inspired bailout for countries in central and eastern Europe, which have come under pressure as funds flow out of their markets.
Moreover, Galy said the European Monetary Union's budget has already been stretched to its limits. He also cited political opposition for creating a bailout program supported by public funds.
"The descent of the euro has been faster than we initially thought. We expect a further undershoot in the euro at least until the summit in mid-November," Galy said, referring to the conference organized by the White House to be held next month in Washington. The summit aims to further address the global financial crisis.
Yet despite heavy bets favoring the dollar, some analysts say the buck could use a breather and fall back for a few days.
"Even though we expect the dollar to climb plenty higher, we're at a point where a corrective move may be long overdue," said Black Swan's Crooks. (Editing by Jan Paschal)

The Long Farewell to the US dollar

This is from the straightgoods site. It will be some time yet before there is any significant movement towards replacing the US dollar. THe US still is the world master in terms of military and political power but as the article points out some changes are already taking place. Iran has set up an alternative arrangement where oil is not traded in US dollars but Euros and other countries too are demanding euros.
The situation is not all bad for the US since exports will be more competitive.

The long farewell to the US dollar

World looking for new reserve currency as US dollar collapses.

Dateline: Sunday, December 02, 2007

by Gwynne Dyer

It's just straws in the wind so far. India's Ministry of Culture announces that foreign tourists can no longer pay in dollars when visiting the Taj Mahal and other heritage sites; they have to pay in good, hard rupees. Iran and Venezuela call for a joint OPEC statement on the weak US dollar, and Saudi Arabian Foreign Affairs Minister Saud Al-Faisal warns that any public reference to the US dollar's problems could cause the troubled currency to "collapse". Rap star Jay-Z's latest video shows our hero flashing a wad of euros, not dollars.

Only straws in the wind, but all in the past couple of weeks. For the majority of Americans who do not travel abroad, the only visible effect so far of the dollar's steep fall has been higher fuel prices at the pump. The Chinese imports that fill the big-box stores still cost the same, because the Chinese yuan is still pegged to the American dollar. But that may be about to change, along with many other things.

At the beginning of 2003, one euro bought one US dollar. Eighteen months ago, it bought $1.20. Now it is pushing $1.50, and there is no reason to think that it will stop there. Three of the world's biggest oil exporters, Iran, Venezuela and Russia, are demanding payment in euros rather than US dollars. Last week a Chinese central bank vice-director, Xu Jian, gave voice to the suspicion of many others, saying that the US dollar was "losing its status as the world currency."

If that happens, then America loses a great deal. Other countries have to maintain large reserves of foreign currencies — most of which they keep in US dollars — to cover their foreign debts, but the United States can pay its huge foreign debts in its own money. If necessary, it can just print more dollars. Having their own money as the world's reserve currency confers advantages that Americans would miss if they lost them.

The main reason for the collapse of the US dollar is President George W Bush's attempt to fight expensive foreign wars while cutting taxes at home. This involved deficit financing on a very large scale, and inevitably the value of the dollar began to fall — slowly at first, but with increasing speed as it became clear that the White House did not care. "Ronald Reagan proved that deficits don't matter," as Vice-President Dick Cheney told then-Treasury Secretary Paul O'Neill.

But they do matter to foreigners. As the US dollar fell in value, the price of oil (which is usually calculated in dollars) rose to compensate for it, but there was no comparable adjustment for foreign central banks that had huge amounts of US dollars in their reserves. China, which was sitting on about a trillion US dollars, simply lost several hundred billion as the currency's value fell. So various central banks started wondering if they should diversify their reserves, and some acted on it....

For the whole story, please go to the related site below.

Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries.


Related addresses:

URL 1: gwynnedyer.com/articles/Gwynnepercent20Dyerpercent20article_percent20p...


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US monetary crisis

This article details the manner in which the dollar props up US hegemony in the world. With the weakening dollar many countries are reducing their dollar holdings and buying other currencies such as the Euro. Of course many people are also buying precious metals such as gold. The article has an interesting and lengthy analysis of the situation. It is at countercurrents.