27 Aug 2008

Will Dollar Fall Another 40 Percent?

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“Jurg Kiener, CEO of Swiss Asia Capital, expects the dollar to lose another 30% – 40% on the dollar index over the next 3 – 4 years.” See the full story.

I’m not sure about the specific magnitude of his prediction, but I definitely agree that the dollar still has to slide significantly, in order to reduce the huge US trade deficit.

In general, a large current account deficit doesn’t mean that a currency is doomed, because a current account deficit is the accounting flipside to a capital account surplus. So for example, if the next US president were to sharply cut marginal tax rates, eschew any massive carbon legislation, open up domestic energy production, etc., then investors would flock to US assets (raising the current account deficit) even as the dollar soared.

But that’s not what’s been happening during the last few years (and it’s not what will happen with the next president!). The massive piling up of indebtedness to foreigners is not analogous to a new bio-tech company going public and raising capital. Rather, it’s more like a lawyer who just got laid off, and continues with his previous lifestyle by racking up credit card debt.

For more details, see my article here.

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