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Tuesday, November 20, 2007

Is the Fed going to sacrifice the dollar?

I always like to keep it simple and obvious when investing.

1) The U.S. banking system is insolvent.
2) The Fed HAS to support the banking system.
3) The dollar is now approaching the psychologically important threshold of 1.50 to the Euro.
4) The Fed and Treasury are making NO noises about defending the dollar (internal politics is more important to them).
5) Most central banks around the world are thinking about how to get out of dollars.

Even though I can't see how the Europeans can be competitive at 1.50, and I think the Euro is overvalued and the Asian currencies are undervalued, the simple obvious facts would point me in the direction of predicting 1.70 U.S. Dollar/Euro in the not too distant future.

Eventually, the market will force to Chinese to revalue, and that might cause the Euro to fall versus the dollar, but that won't happen immediatly. The way I see it, the dollar (a.k.a. the American peso) will continue to fall against the Euro and Americans will stay buying Yuan en masse like rats jumping off a sinking ship. China will be flooded with dollars. That will force the issue.

I for one am buying Yuan. It's as if the Chinese government is writing me a check. Thanks Chinese government.


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