Watch These 3 Scenarios As They Unfold In 2004
As
a currency trader and analyst, I cannot be surprised
at what took place in 2003. The dollar was under pressure on all fronts, except
Mexico, but one has to believe that the onslaught against the dollar began as
a policy choice of the US administration and accepted by the Federal Reserve.
A weaker dollar would help boost exports as well as providing an inflationary
impetus to another wise deflationary outlook. The Fed has been worried about deflation
by its own policy pronouncements — hence the negative short-term real interest
rates in the US gave the dollar the push it needed to start the decline. This
is the summation of 2003, but what will it mean for 2004?
- How
much euro strength will the Europeans tolerate before the European economy
begins to weaken?
We will have to monitor their statements. The problem with Europe is that
they have an inflexible labor market. They do not have the luxury of labor
layoffs when the economy starts to weaken because the large European economies
are saddled with labor laws that prevent the shedding of jobs — hence
the strong currency does not result in the necessary restructuring. This will
be problematic if the weak dollar leads to a slowdown in European exports. - Will
dollar weakness lead to cuts in interest rates in non-dollar economies, leading
to negative rates of return around the world? If this were
to happen, it would result in the price of gold appreciating in all currencies.
The dollar may stabilize but gold will gain against all paper currencies.
This will be the most important scenario to watch, as it will signal a major
turn in the world economy as it will lead to the long-term debt market coming
under pressure as the world financial community seeks safe haven status. Also,
this scenario would probably lead to an end of the equity rally — steepening
yield curves are generally equity positive but at what point will that relationship
dissolve? - Will
the weak dollar scenario continue to push the Chinese to stockpile real assets?
The Chinese were busy purchasing hard assets (copper, soybeans, oil, etc.)
as they wanted to insure that the dollars that they earned were worth something.
This was akin to AOL buying Time-Warner, which was merely an exchange of overvalued
paper for a real asset — the basic premise of what economists term Gresham’s
Law, in which people hoard good money while spending the bad or overvalued.
If this practice continues, there will either be a large increase in worldwide
inflation or the pricing power of corporations will be so badly squeezed that
the global equities will in no way be able to support the year-end prices
of 2003. Hence the dollar is the linchpin but the dilemma will play out in
the US with the reality of the Presidential election vs. monetary and fiscal
responsibility. I will revisit this theme throughout 2004 and hopefully find
opportunities for financial gain in this environment.
Happy and healthy New Year to all
and here’s hoping for a prosperous year. Remember, the picture might be
easy to see as an investor but a trader must be disciplined and able to react
when the picture is right but the momentum changes. Good luck to all and remember
— stay disciplined.