The Dollar, The Ugly Contest

In dollar news yesterday, Dollar Rises to Three-Week High Against Euro on U.S. Stimulus.

One suggestion as to what might be happening was talked about in an interview with Stephanie Pomboy linked here previously,

[A] weaker dollar is the natural valve. But right now, we are enjoying some real competition in the ugly contest from the currencies of the European Union and the United Kingdom, and that will probably persist for a while because they are in pretty bad shape, and they are a little bit behind the curve relative to us.

From Matthew Lynn’s take on some things that might happen this upcoming year, it looks competition in the ugly contest might get a little fiercer.

Britain calls in the International Monetary Fund: In the last few months, the U.K. has been a lesson in how to turn a crisis into a catastrophe. Everyone knew its debt-fuelled, financial-services-dependent economy would need a painful overhaul to develop new industries. Instead, Prime Minister Gordon Brown has embarked on one last borrowing splurge. With the pound already in freefall, the U.K. will run out of money and have to beg the IMF for a bailout.

So as long as the US continues to lose (or is it win) the “ugly contest” it seems that things are under control.

As one commenter noted on a previous post,

The US dollar may well continue to be the least bad place.

More optimism as Ambrose Evans-Pritchard comments in US will emerge as undisputed top dog in 2009.

The country will reemerge as undisputed top dog, the only one with real demographic, scientific, and strategic depth. As first into the crisis, it will be the first to hit bottom. Those expecting the dollar to collapse will have to wait.

Later in the article,

By late 2009, the massive monetary and fiscal stimulus will feed through. Angst will start to switch from deflation back to the risk of incipient inflation. Equities, oil, and gold will rally. Bonds will falter, and then crash.

At that point it will become clear that reflation is just as dangerous as deflation in a world of debt. We will find that there is no way out. But that, perhaps, can wait until 2010.

It will be interesting to see how this all plays out.  If the consequences were not so extreme, it might even be fun to watch.


A Homely Parade in the Currency ‘Ugly’ Contest


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