The $ will continue to slide.
The slide in the US$ is expected to continue for the long term as a result of the attention that investors in US treasuries are now paying to the massive current account deficit. Other key trends help highlight the depth of the problem.
1. at the end of 2002, net external debt reached 25% of GDP.
2. foreign direct investment has turned negative as a percentage of GDP. To keep foreigners buying US assets their price must fall which implies that the $ must fall relative to their domestic currency.
3. US imports rise 1.8% for every 1% increase in US spending while a 1% increase in foreign demand produces a 0.8% increase in US exports. It is therefore difficult to close the current account deficit solely by increasing exports. (Peter Hooper, Karen Johnson, Jaime Marquez, Federal Reserve). This also means that if the US grows faster than the rest of the world its deficit will further worsen.
The debate on how large the drop will be continues to rage�there is however consensus on the fact that it will be have to be large (15-35%) to bring the current account deficit into the range of 2-4% of GDP. While I cannot provide personalized investment advice or recommendations, I welcome feedback and observations by subscribers. You can email me at leena@arbitragecapital.com
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Disclaimer: Leena Nehru-Schimert is a director at Arbitrage Capital Management, which manages the Arbitrage Capital Management Fund, LP. Ms. Nehru-Schimert’s columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.
