"Dollar May Plunge" - Mr. Yen

It's hard to believe that the greenback could fall dramatically further, but Eisuke Sakakibara, aka "Mr. Yen," says that is a distinct possibility.

The dollar may ``plunge'' in 2008, prompting the U.S., the European Union and Japan to intervene in foreign exchange markets, said Eisuke Sakakibara, Japan's former top currency official.           

U.S. economic growth may slow to less than 1 percent next year as losses on loans to homeowners with poor credit erode consumer spending and bank earnings, he said in an interview today in Tokyo. Sakakibara, 66, was dubbed ``Mr. Yen'' because of his ability to influence the currency market during his 1997 to 1999 tenure at the Ministry of Finance.           

``Should growth fall below 1 percent, we could see a plunge in the dollar,'' said Sakakibara, who is currently a professor at Tokyo's Waseda University. ``Some form of intervention would be necessary to stop it, and that would require coordinated effort from all three major economies.''

I'm beginning to wonder, if the dollar does plummet, will the Fed engineer a recession to save the dollar by jacking up interest rates?  I give the odds of this happening at 10%.  A few weeks ago, I would have said 1%.

The chosen method of the American government for dealing with economic mis-allocation of resources, i.e. bubbles and crashes, has been to crank the printing presses as opposed to enduring a recession (apart from a few minor ones) and cleaning out the excesses of the economy.   Perhaps the chickens are coming home to roost, as the growth that was pulled forward to deal with the collapse of the tech bubble appears to be petering out, the economy flirts with recession and the dollar hits multi-decade lows. 

My guess that the reaction of foreign central banks will be to print money, increasing the value of the dollar relative to other fiat currencies.  This is enormously bullish for gold, of which I am long.

Liquidity that will be created by further rate cuts as a response to the housing and mortgage problems will not flow into housing and mortgages.  Instead, the liquidity will flow elsewhere. 

Therefore, as investors, we must ask, where will the next bubble arise?  I am thinking maybe into precious metals. 

Comments

[Anna Coulling]

As a full time currency trader in the UK, I thought I would add my comment to your post on the Yen and the Japanese economy. In simple terms I believe there are several things to remember when trading the dollar yen or investing in yen assets. Firstly, the economy is unlike any other in the western world. It is highly dependent on its export markets which in turn are highly dependent on the strength or weakness of the yen. This in turn affects the speculation on the yen and in particular the carry trade which has been a favourite for many years due to the very low interest rates. This is likely to continue for some time to come and my own personal view is that the rates may be cut later this year back to 0.25%. Now bear in mind that a strong yen will adversely affect exports, and the interventionist Bank of Japan will ensure that this does not continue. In short, a recipe for a weak yen to dollar relationship for the foreseeable future. My personal view is that the pair will bounce back from below the psychological 100 barrier, back to somewhere between 105 and 110 in the short to medium term.

[Anna Coulling]

As a full time currency trader in the UK, I thought I would add my comment to your post on the Yen and the Japanese economy. In simple terms I believe there are several things to remember when trading the dollar yen or investing in yen assets. Firstly, the economy is unlike any other in the western world. It is highly dependent on its export markets which in turn are highly dependent on the strength or weakness of the yen. This in turn affects the speculation on the yen and in particular the carry trade which has been a favourite for many years due to the very low interest rates. This is likely to continue for some time to come and my own personal view is that the rates may be cut later this year back to 0.25%. Now bear in mind that a strong yen will adversely affect exports, and the interventionist Bank of Japan will ensure that this does not continue. In short, a recipe for a weak yen to dollar relationship for the foreseeable future. My personal view is that the pair will bounce back from below the psychological 100 barrier, back to somewhere between 105 and 110 in the short to medium term.