When Economic Worries Grow, People Run Home

August 9th, 2008 at 12:03am Mark Noonan

To the US dollar:

US stocks soared on Friday as the dollar saw its biggest one-day jump against the euro in eight years and oil prices plunged.

The moves marked a key reversal of a trend that many investors had followed profitably for months – betting that high commodity prices would keep the dollar weak.

The dollar reached its highest in five months against a trade-weighted basket of currencies, while oil fell more than $5 to $114.87, 22 per cent below its record high of $147.27 last month. The S&P 500 closed 2.4 per cent higher in New York.

The shift in sentiment was triggered by Jean-Claude Trichet, president of the European Central Bank, who warned on Thursday that third-quarter eurozone growth would be “particularly weak”. This sparked talk that the ECB would be forced to abandon its hawkish policy stance and start cutting interest rates, thereby weakening the euro.

“This is the watershed week for the US dollar,” said Marc Chandler, currency strategist at Brown Brothers Harriman. “The magnitude of the dollar’s moves and the breaking of key technical levels suggest that a major shift in the outlook towards the dollar is occurring as massive positions are adjusted.” Other analysts described the widespread buying of dollars as “capitulation”.

The dollar hit a five-month high of $1.5055 against the euro and climbed 1.3 per cent to $1.9189 against the pound – its strongest since November 2006.

Traders said the violence of the move was testimony to the extent to which the market had been surprised by economic weakness outside the US.

“Mr Trichet was unable to convince the public that the ECB had not been surprised by the eurozone’s economic downturn,” said Ulrich Leuchtmann at Commerzbank. “Therefore, the last remaining rate hike expectations were taken off the table.”

Why is this? Because if you’re looking for security, there’s nothing quite as good as the American economy and American law - we actually have the highest business ethics in the world (I know, hard to believe, but there it is) as well as very transparant requirements in corporate reporting which makes the investor confident that when he plunks his money into the United States he’ll know where it is and what can happen to it. Couple this with the largest economy in the world (I know, the Eurozone is supposed to be that, but that is mostly a mirage produced by massive Eurozone government spending), and you get the bank of last resort, the United States of America.

Bulwark of liberty, engine of economic growth, bastion of Judeo-Christian civilization - the United States serves many purposes, and with this comes a great responsibility. We simply must protect this great thing, the United States of America. We daren’t negligently throw it away in a bid for shallow popularity - hard as it may be to take, if what the United States must do is protect fools in their folly, then that is what we’ll have to do, in the hopes that the fools will learn wisdom. The people who complain about us the most are those who live most solidly lapped in the wealth and privilege built up by the long peace guarded by the United States (meaning, of course, that it has been because of us that no world war has erupted in the past 60 years). They glory in their wealth and power and know not where it comes from - its not so much biting the hand that feeds them, but biting the hand of a benefactor they don’t even recognise.

Its all good - those who have wisdom and strength are to use it for the benefit of others, and if all we do is what we can for the best, then we’ll have done all that is required of us.

Tags: dollar vs Euro, EU, oil price

Entry Filed under: Economy, Foreign Affairs