the currency wars, page-7

tom, if I did worry it wouldn't be about either the US or AUS. The beauty of flexible floating exchange rates has a bipolar economic effect that forces the balance of purchasing power against currency demand.

The AUD has a tiny speck of the volume of the USD so is very sensitive to changes in demand - and a poor performing (low) AUDUSD coupled with high resource demand would be most welcomed indeed - but this is a rapid self balancing mechanism in itself in my view that pushes the AUD back up again. Until you remove the resource demand, this won't reset the AUDUSD in spite of government incompetence until GDP, interest rates and debt repayments are affected by sustained trade deficits and a withdrawal of foreign investment.

But you raise an important point about Asia and monetary volume. As for bonds, the US government is running the largest budget deficits in history with record exoanding debt levels. In spite of this, ZIRP (zero int rate) is the only thing currently saving bond auctions from failure. This is a bond market carry trade using lower than bond yield borrowing rates. In doing so the Fed Fund rates won't go anywhere for a while. The broader markets knows this, and is showing what it thinks about it. The US Gov't currently needs people to buy it's debt anyway they can.

Further thinking is many Asian traders would tend to hoard cash USD as a not-so-small black market of undocumented USD transactions. (Locally inside borders, have done for many decades) - this cash is now not worth as much as 1980 levels, or even 2006. Coupled with rising base resource prices, several currencies are now trading at parity with the USD (CHF, CAD, AUD). You say the USD comes back into strength in some fashion - I say people start to make alternative arrangements.

We (AUD) are not overvalued until either our GDP takes a hit, or the US finds a legitimate miracle cure for it's financial mess. Our standard of output and GDP are comparable to the US in the current climate. No reason for this to change unless Japan, China and India slip up.

The unknown is at what point Asian traders refuse to accept the USD - with China being the pivotal player - and start to ask for a local currency or commodity alternatives instead. China is doing this by buying resources, and global resource realestate using excess USD. This alone would be scaring the carp out of US moneymobsters. We have not seen a prolonged/sustained period of poor USD exch rates yet - maybe we are about to.

What is quite conceivable to me is the preference for commodity trading replacing USD currency trading if commodities keep gaining in value like they are.

Might be a stretch, but I think China's awake to what the US can't and cannot do. Both the EUR and US are export market dependent, not only China. China can always play home improvement if the world goes further pairshaped as it stands to win with cheaper commodities yet again - only it will force people to trade in RMB (Yuan) next time if it loses the surplus to US (if they want Chinese business).

Any way I think about it, the USD is pushing a loaded barrow of cow dung uphill with a flat tyre.

rgds,