Saturday, November 05, 2005

Dollars, Euros and Pounds

The foreign exchange markets have decided that the President won't be paralyzed by Fitzgerald and the Dems - the Dollar is at its strongest against the Euro for 6 months (1.81) and the Brit Pound is also strong. I blame the French.

Traders claim to trade on economic fundamentals - trade balances and interest rates. But I've watched them carefully, and believe that although these have some effect, feelings about the soundness of currencies are more significant.

This is reasonable - traders' big exposures are unexpected discontinuities, for example Katrina taking out US oil production (which of course it did not). Plus, every nation has some sort of underlying problem - the US current account deficit, the Eurozone's moribund economy, Brit state pension liabilities, China's drift to war with Taiwan. Which domino will fall first is very hard to call.

So as soon as a nation looks flaky, they sell its currency.

The Euro is weak because Paris suburbs are burning, and the dollar is strong because the President is undamaged, Iraq is moving towards democracy and Katrina had little effect. Brit sterling is holding up because it isn't the Euro.

If sustained, this is good news for the Eurozone - its exports should improve!