30th October 2008
US Dollar
In my previous reports I have mentioned time and again that I expect EURO/USD to reach 1.75 by December 2008. Then in July and onwards the rise of the USD was much stronger then I anticipated (though I correctly pointed out the strengthening of the USD before the Euros Fall in July), and hence I felt that 1.75 will not be achievable in December 2008, but rather in Jan or Feb 2009.
I feel the best approach would be if I provide scenarios:
Scenario 2: Euro falls to 1.2300 in November 2008.
Scenario 3: Euro does not come down to 1.2300 again but keeps drifting higher.
As of now Probabilities of the above scenarios is:
Scenario 1: 80%
Scenario 2: 20%
Scenario 3: 5%
The above probabilities have to be revised each week, as new data becomes available.
- One must make a distinction between the real economy and the paper economy or asset based economy. For example when you have a house which is worth 200,000 USD and then its value falls to 50,000 USD, You still have your house and that is real. The paper value has come down. The value could come down due to collapse of the property prices or due to loss of value of the currency in which the property is priced. In US the paper economy will collapse but real economy will continue though slowly.
- There are various assets in the world, stocks, mutual funds, property, bonds, T-Bills, gold, silver, Soft commodities and oil. The paper value of all these assets is coming down. Eventually investment grade assets will come down in value, like stocks, bonds, etc and will take long time (4-7 years) to go up. Real assets (particularly those that are life essential (like food and safe haven) will go up in value. Real assets include agricultural commodities and gold and silver.
Why did the USD become so strong so fast?
- Money is being pulled out of emerging markets, because of which currencies of those emerging markets are getting weaker and USD is getting stronger. Example
- There is a general flight to cash during market liquidations and the USD assumes status of safe haven currency. Gold, Oil, stocks, everything is being sold. This is called deleveraging of markets.
- Cash hoarding – as businesses cant rollover credit and a general tendency now to hold money.
- Year End is also approaching so closing of books is to be done.
- Certain market manipulation can’t be ruled out. Of course Central Banks call it supporting the system.
Madan Sharma