I don't know if this has been posted and discussed before but I find the second paragraph really intriguing. I don't disagree with all his statements but I for one don't believe that US Dollar could spike much further due to shortage.
I can't paint a pretty picture for US dollar in short term.
FORBES Article published yesterday by James Gruber.
So markets wait with bated breath on the words of a bearded academic-turned-central-banker on September 18. Bond king, Bill Gross of Pimco, probably has it right suggesting Ben Bernanke and his Fed have already agreed on a small cut to QE even though economic data out of the U.S. has shown only marginal improvement. I’d add that that Bernanke and his minions would remain concerned with rising bond yields and interest rates and if both head higher in the months ahead, all bets on further QE tapering are likely to be off. Perhaps the word “re-tapering” may soon enter the financial lexicon?
Today I’d like to step back from the “will he or won’t he taper” debate and look at an interesting, and still minority, view developing that there are structural factors beyond QE tapering which may drive both the U.S. dollar and U.S. bond yields higher in coming years. The argument goes that an energy boom in America will result in a further decline in the U.S. trade deficit, reducing the number of U.S. dollars being supplied to the global economy and thereby creating a scarcity of U.S. dollars which will inevitably push the currency higher. A reduced U.S. trade deficit will also result in contracting foreign exchange reserves for overseas countries, reducing foreign demand for U.S. Treasuries and pushing up government bond yields which will help the dollar further.
Don’t worry if you didn’t get the full thread of the argument as I’ll lay it all out for you below. Suffice to say though that if the view is correct, it’ll have enormous ramifications, including for our neighborhood of Asia. For instance, it may mean the recent currency turmoil in Asia is only a taste of things to come (higher U.S. yields leading to reduced flows into Asia ie. tighter liquidity).
I don’t happen to agree with much of the argument and will outline why. But it seems like a debate worth having as it goes to the heart of some of the key issues which will drive economies and markets going forward.
