In its wrap-up of yesterdays increase in the federal funds rate target, The Capital Spectator opines:
... using recent history as a guide, no one's made any money predicting that the trade deficit would reverse course. Will the future be any different?
Perhaps not, assuming the gold market harbors the truth about inflation expectations. The precious metal continues to hover near 17-year highs of late. If gold has any sway at the Fed, more interest rate hikes are coming, which means more support for the dollar and perhaps even deeper trade deficits.
Even if you are not convinced that further rate hikes from the Fed will do the trick, there is always the fallout from the German elections that has, shall we say, taken some of the luster off the euro (at least temporarily). Edward reports at A Few Euro More:
German investor confidence fell in September due in major part to uncertainty about the country's future economic policies, a survey by the ZEW economic think tank showed on Tuesday.
ZEW's expectations indicator, based on a poll of 309 analysts and institutional investors, fell to 38.6, from 50.0 in August.
And that probably doesn't even capture the full effect of the uncertain world into which we've been thrown by the inconclusive German election results. But wait -- there's more:
Poland is having elections Next Sunday. They are getting rather less press coverage than the German ones, but one issue does now seem to have hit the news...
The latest opinion polls tip Civic Platform to win the general elections by 32 percent with Law and Justice picking up 27 percent and the pair planning to form a powerful new coalition that will be less friendly toward the euro and the EU Constitution than the present left-wing government (SLD).
Not the stuff from which a dollar depreciation is made. But in the other corner -- wearing the dollar-will-soon-be-waving-the-white-flag trunks -- is this from Cynic's Delight, suggesting the foundation for the dollar retreat that Brad and Nouriel have been warning us about is being built even as we speak:
Domestic Asian bond markets have been growing like gangbusters in recent years, and as they grow ever more deep, liquid and sophisticated, they will provide opportunities for Asian savers to invest at home. Given that Asian demand for US Treasuries has been propping up the dollar and keeping US interest rates low, the rise of Asian bond markets has profound ramifications for the global economy, and dollar exchange rates and US interest rates in particular.
The recent efforts to promote capital markets across the Pacific are, admittedly, starting from a low level and have many hurdles to overcome. But concerted efforts from government ministries and financial institutions are starting to yield results. The size of domestic bond markets across East Asia have tripled since 1997, and corporate issues have grown at an 18% annual pace. The total amount outstanding of local currency denominated bonds in East Asia reached 44% of GDP last year, up from just 19% in 1997.
Egads! The pressure is definitely on for the dollar to decline -- except for the pressure for it to increase.
More in part 2.