Currency- Dollar vs Euro! (IRA, trading, wage, market)

[SPNARD1]

What would you do now?

Long the dollar, short the euro? vice versa?

Does anyone else think the euro's run has ended?

[ViewFromThePeak]

Originally Posted by SPNARD1

What would you do now?

Long the dollar, short the euro? vice versa?

Does anyone else think the euro's run has ended?

If countries don't disband from the Euro, there's no end to the distortion between the the USD and Euro. The ECB is not caving in to Peso Paulson's attempts for them to cut rates.

There's going to be a day soon, I'm certain, that we will go to bed and the dollar will be worth 20-30% less when we wake up (according to the index, not just the Euro)

[Mircea]

Originally Posted by SPNARD1

What would you do now?

Long the dollar, short the euro? vice versa?

Does anyone else think the euro's run has ended?

Do you understand why the US$ has lost value against the Euro? The value of any currency is based on supply and demand against other currencies on the world market, and to a lesser extent confidence in the government and economy of a country (something which is difficult to quantify).

Prior to 2000, the US$ was the International Reserve Currency and the International Trade Currency. Effectively, central banks hoarded US$ artificially reducing the supply to drive the value up, and all commodities, oil, natural gas, coal, metals, ores, minerals, timber and agricultural products, were traded in US$ creating an artificial demand for US$ which drove the value up. Even so, the primary engine driving the US$ was sale of oil and natural gas, hence the term "Petro-Dollar."

Even the "sworn enemies" of the US, like USSR/Russia, the East Bloc, China, North Korea, Iran, Cuba etc were forced to buy and sell commodities in US$ and retain large quantities of US$ as a reserve currency in their central banks.

That changed in 2000 when a little country, namely Iraq, told the US to get bent and started selling its oil in Euros instead of US$. That caused the US$ to slide against the Euro, and many countries seeing the inherent weakness of the US$ tied to oil, started initiating bi-lateral trade agreements conducting commodities trading in Euros or basket currencies, instead of US$, which ultimately cause the US$ to slide 20 points.

The US invaded Iraq in 2003 and at gunpoint forced the Iraqis to stop selling their oil in Euros, but it was too late, and the brazen US action angered a lot of countries who immediately protested by dumping their US$ currency reserves. The dumping spree got so bad that the US ceased publishing the M3 in March of 2006 (the M3 is the amount of US$ held by foreign banks).

Then in July 2006, Russia announced it was dumping 100% of its US$ and purchasing Euros and gold, and it ceased selling its commodities in US$ and now sells them in Euros and Rubles. Over the last 18 months, the Ruble has skyrocketed in value against the US$ going from Ruble 37 = $1 to Ruble 23 = $1. The US$ dropped another 10 points, plus China, Vietnam and many other countries continued to dump US$.

Then Japan and Iran reached an agreement to sell oil in Yen, and the US$ slid a little further, and China and Iran reached an agreement to buy oil in Yuan, which I thought might start June 1, but I think China will hold off until after the Olympics. That will push the US$ down to about $0.58 = 1 Euro.

Angola, Algeria, Venezuela and Nigeria are pushing to sell their oil in basket currencies instead of the US$. As associate members of OPEC, they don't have any say in the matter, but certainly the Iranians and Qataris are supporting them and OPEC will either have to allow them to do that, or they will defect from OPEC and sell their oil independently on the world market.

That will probably happen later in 2008 or sometime in 2009, and you should expect the US$ to bottom out somewhere around $0.42 = 1 Euro.

You don't have to worry about the US$ collapsing, because the US has a large export market selling things in US$ to create a demand, and Canada, Mexico, and the US-puppet governments in Central and South America still hold US$ currency reserves and trade in US$.

If the US invades Iran and seizes the oil fields in Kuzehstan, it can force the Chinese and Japanese (and others) to pay for the oil in US$, and that would drive the US$ back toward $0.70 = 1 Euro. Then the US would have an air and land corridor from the Persian Gulf/Arabian Sea to force its hegemony on the Central Asian states and can extract the oil and natural gas in pipelines through Iran with it's new US-friendly government and dictate that the oil and natural gas be sold in US$. That would drive the US$ up another 10 points.

Other than that, get used to it. There's no set of circumstances that would cause other countries to start buying up US$ again. Many of the smaller countries have discovered a new found freedom, that without US$ currency reserves, the US can't screw with them and torment them any longer, so they'll stay with the Euro.

I'm sure many people fantasize that Putin will come to the US and get on his knees and beg forgiveness for dumping US$ and admit the error of his ways and start selling commodities in US$ again, but that's just a dream.
Unless the US invades Russia and destroys it, $1 will never equal 1 Euro again in your life time. Of course that assumes China hasn't de-coupled from the US$ and moved to a basket currency in preparation for a unified Asian currency (why do you think Japan wants to pay for oil in Yen instead of US$?).

Smart people will just accept a low value US$ and rampant Cost Inflation as part of a changing world and plan accordingly. If you have two wage earners in your household, the best thing to do is start practicing living on one income, since its highly probable that one of you will permanently lose their job in the next 10 years.

[Xpat]

Very well said but there are a few more points to consider.

As oil demand continues to skyrocket, it is in the (short term) interest of the European Central Bank to keep the dollar low since this has insulated their economies from the shock of high oil prices.

In the longer run, we are seeing it lead to an acceleration of the de-industrialization of Europe as firms start closing shop and moving into the dollar zone. Airbus is taking a beating, along with export drops by Mercedes, BMW, Volkswagen, the Italian clothing and shoe manufacturers, and hundreds of other firms. At some point, the ECB will find itself buying more dollars to prevent the slide. It won't bring the dollar back where it was but it will recover some lost ground.

In the meantime, some European governments are still considering pulling out of the Eurozone since their economies are taking a hard hit in competition with other European firms. Italy always inflated its way out of trouble but once they joined the Euro, they lost that lever. It seems every week another politician in Italy is proposing to bring back the lira. If they pull out, I don't expect any new countries to join the Eurozone and its value as a reserve currency will take a hit. That said, in 10 years we could see the Russians pegging the ruble to the euro (though it will be presented as a partnership).

You raise an interesting point on the Chinese. If they start buying oil in Yuan, I agree that the dollar will take another hit. I think it is also the start of the next big shift toward a world of three main currencies; the dollar, the euro, and the yuan.