VodkaPundit

More Mo' Money

Last week, we talked about the why the dollar has been so weak against the euro.

Today, let’s look at why I think the dollar will appreciate 10% against the euro this year. David Ignatius has the answer:

. . .many analysts (me included) have warned that a further sharp slide is likely this year as China and Japan begin to dump their surplus greenbacks.

Among the leading worriers is the International Monetary Fund, which warned in its latest “World Economic Outlook” in September that a further decline in the U.S. currency is likely and that “a disorderly adjustment — or overshooting — remains an important risk.”

But let’s consider a contrarian answer to our New Year’s financial puzzle: Perhaps the Asian nations are pursuing an entirely rational strategy — one that seeks to maximize domestic employment rather than financial return. If that’s so, then financial traders can stop fretting so much and applaud a dollar that’s playing much the same stabilizing role it did 50 years ago, during the golden days of Bretton Woods.

China, which has the renminbi pegged to the dollar, has been hording greenbacks in the exact same way a drunken sailor doesn’t. Why not sell them for euros, if they’re depreciating so badly? Because to do so would further weaken the dollar — perhaps so much as to “unpeg” it from the Chinese currency.

Then China would lose exports. Then they’d lose jobs. Then the Party bosses might just face the 9mm retirement plan (also known as “Coup Flu”).

Same goes to a lesser exetent in Japan, South Korea, Thailand, and Taiwan. [badmixedmetaphor] They’re all stuffing dollars under the mattresses because the skeleton of export-driven, managed economies is hiding in the closet [/badmixedmetaphor].

Or at least that’s what Deutsche Bank economist Peter Garber thinks, and I’m inclined to agree. So, if China and Japan keep hording like China and Japan, and if Germany and France keep their economies muddling along like Germany and France, and if the US keeps growing like the US — then we should see a stronger dollar in 2004.