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tobias

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fxguy,

You said in another thread that you are bullish on the USD. Why and for what time horizon?
 
Hey guys - been slammed at work this week....

Tobias - To answer your question, yes I am bullish on USD, as I'm bullish on the US economy outpacing the rest of the G7, I basically agree that a strong cyclical rebound here will support the dollar.. But there are considerable risks that no one denies - I'd have to agree, that in the short term that dollar will probably turn on a weakening trend due to a large US output gap (think of this as the amount of slack in our economy - especially the labor market).

This coupled with rising commodity prices and increased risk appetite will not be good news for the greenback as the liquidity and safe haven premium is eroded. All this talk about SDR's and removing the dollar as the reserve currency (although it mostly is just all "talk" right now) also could pose a risk of much faster dollar deprecation.

Basically I would expect to see gradual further depreciation followed by renewed strength towards the end of next year as the signposts indicate that the US output gap is closing. I don't see the reserve status of the dollar being challenged anytime soon.

dedalus - not planning on going to that conference but it looks interesting, are you going?
 
Thanks for getting back to me. I am leaning more bearish USD but it's a longer-term view based on our increasing deficit spending and high debt load relative to GDP, coupled with the secular trend of China, Brazil, etc. outpacing our economy. Based on your screenname I assumed you would have a shorter-term view (what currency trader doesn't, after all?). So, on the shorter-term, my question is this:

Everyone points to the output gap as providing a near-term cap on inflation. If you believe in the strong cyclical recovery, as I do, then you expect that the output gap closes and the velocity of money increases. Without a commensurate reduction to the money supply, won't we see some deterioration in the dollar and high inflation?

I agree that the dollar isn't going anywhere as a reserve currency but I also worry about the prospect of a country like China diversifying.
 
>>>Without a commensurate reduction to the money supply, won't we see some deterioration in the dollar and high inflation?

That's just the thing. No one realises that the Fed can shut down TARP, TALF, PPIP, and all of these other programs as soon as needed, thus drastically reducing the money supply. They have proven (in my mind, at least) that they can and will pull these levers at the right times. I don't think it's going to happen soon, but there are definite steps they will take to stem inflation. I think if we have to worry about inflation that's probably a good thing, I'd say were more at risk of deflation presently.

I agree with you on the high debt load part, but I think the US is going to be the economy to lead us out of this mess, not BRIC. I think the rest of the world is more dependent on what is happening HERE, rather than the other way around.

And to clarify, I'm more of a currency hedger than a currency "trader", so no real outright speculation
 
Tobias - what do you do, if you don't mind me asking? You seem to having a good understanding of what drives the fx markets.
 
I'm an analyst at a long/short equity hedge fund.

I just don't trust the Fed/Treasury to know when to pull the plug.
 
Still - I really don't see inflationary pressures as a key risk right now.
 
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