Dollar “on the run” in Asia

posted at 8:45 am on July 14, 2011 by Ed Morrissey

I’d blame this on the Presidential Temper Tantrum, but the proximate cause of the US dollar’s overnight decline was actually Cheerful Ben Bernanke.  After the Fed chair told Congress that a third round of quantitative easing might be in the offing if deflationary pressure began building, the market in Asia called his bluff and began dumping the greenback.  One JPMorgan analyst called that news “unambiguously bad for the dollar” (via Instapundit):

The U.S. dollar was on the run in Asia on Thursday after a ratings warning from Moody’s and a hint of further policy easing from the Federal Reserve unleashed a wave of panic selling, much to the relief of the hard-pressed euro. …

“Three months ago all the focus was on the exit from unconventional policy; now Bernanke mentions the conditional possibility of QE3,” said Paul Meggyesi at JPMorgan. “This is unambiguously bad for the dollar and good for risk.”

Investors seemed to agree, sending commodities and gold higher and lifting growth-leveraged currencies like the Australian dollar.

The U.S. dollar slid to a fresh record low against the Swiss franc around 0.8089 francs, while the euro leaped to $1.4253 having been as low as $1.3984. The dollar also deflated to 78.83 yen with only talk of semi-official bids preventing a break of major support around 78.40/50.

Against a basket of currencies, the dollar was down at 74.773 .DXY, having tumbled for a high of 76.053.

The New Zealand and Australian dollars were the big winners in the Asian market overnight.  Unless Congress and the White House can agree on an approach to limiting spending and authorizing debt, this might just be a taste of what will come by the end of this month.  Investors have “growth-leveraged currencies” to which they can flee the dollar, and not just in Australia and New Zealand.

Even with a deal, though, the US economy will drop into recession, according to Gary Shilling, and it will be a further decline in the housing markets that will do the trick:

Gary Shilling, President of A. Gary Shilling & Co. and author of the Age of Deleveraging says another recession is brewing — no matter what action the Fed takes. “Economic growth here and abroad is slipping, making a 2012 recession a distinct possibility,” he writes in his July newsletter. And, “when you have slow growth it doesn’t take much of a shock to throw you in negative territory.”

Shilling says the shock to trigger the next recess is “another big leg-down in housing.” (An asset class the Fed has not been able to reflate.) As those familiar with Shilling know, his forecasts are generally bearish.  However, in his defense, Shilling was one of the few economists who correctly predicted the dangers of the subprime mortgage market and its impact on the broader economy.

The problem with the real estate market remains excess inventory. Based on Shilling’s research, there are 2 million to 2.5 million excess homes in the country — a supply that will take 4-5 years to work-off. The result: Housing prices will fall another 20% and underwater mortgages will balloon from 23% to 40%, he says.

It’s not just the excess inventory — it’s the still-inflated valuations, too. We still haven’t relinked house values to historical inflation, according to the latest S&P/Case-Shiller report:

The Fed can’t do anything to “reflate” the market, and it shouldn’t try.  That’s been the problem in this market for the last 13 years.  The government tried inflating the market, at first inadvertently with mortgage interventions in order to press for broader home ownership, and later to allow homeowners to use their houses as ATM machines to spend money that really didn’t exist.  The 20% decline that Shiller forecasts would put us about on the track where home values would have been had government not intervened and created a bubble that separated home values from inflation, which had been linked for decades.

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My wife was recently back home in the Philippines. A dollar is worth much, much less there than it used to be.
Thanks for the monumental shrinking of US wealth, Mr President.

itsnotaboutme on July 14, 2011 at 8:52 AM

“Next” recession? We are still in the same one. We haven’t recovered yet.

NotCoach on July 14, 2011 at 8:58 AM

I’m pretty happy to be holding GLD right about now :-)

MJBrutus on July 14, 2011 at 8:58 AM

Why would you expect anyone to think the dollar is going to stay strong when you are saying that you might weaken it.

Slowburn on July 14, 2011 at 8:58 AM

Redistribution.

petefrt on July 14, 2011 at 8:59 AM

the dollar also deflated to 78.83 yen

I was stationed in Japan when Nixon decided to allow the dollar to float. At that time is was 360 yen to the dollar. My how the mighty has fallen.

chemman on July 14, 2011 at 9:01 AM

MJBrutus on July 14, 2011 at 8:58 AM

Yassir. Think it’ll top 1600 this week? Next week?

petefrt on July 14, 2011 at 9:01 AM

Utah Spurs Gold Rush by Jeffrey Bell

Ever since the Utah House passed the bill by a 47-to-26 vote following a half-hour debate on March 4—and well before the Legal Tender Act became law on May 10—Utah’s drive to define U.S.-minted gold and silver coins as official in-state currency has attracted attention in the national and international media—including respectful front-page coverage in the New York Times on Memorial Day, three days before Gov. Herbert’s ceremonial signing.

NMRN123 on July 14, 2011 at 9:02 AM

NotCoach on July 14, 2011 at 8:58 AM

Take a look at a cotangent curve and that describes this recession.

chemman on July 14, 2011 at 9:03 AM

Liberals will never understand economics. They also never learn from experiences with unintended consequences. “Gee, only ‘rich’ people own homes….let’s make it so that EVERYBODY can own a home.” So Bill Clinton, Barney Frank, Chris Dodd and many more went about trying to do that. By artificially driving demand for homes through the roof, they drove the price of housing artificially through the roof. Liberal Democrats own the housing bubble.

olesparkie on July 14, 2011 at 9:05 AM

My wife was recently back home in the Philippines. A dollar is worth much, much less there than it used to be.
Thanks for the monumental shrinking of US wealth, Mr President.

itsnotaboutme on July 14, 2011 at 8:52 AM

Alls I know is it’s way more expensive to import Blu-rays than it used to be. I buy enough stuff from Amazon UK(and occasionally France and Germany) to know when the dollar has declined considerably. The exchange rate for a while was roughly 1.4 dollars/1 pound around the time Obama came into office. It’s now 1.6 dollars/1 pound.

Doughboy on July 14, 2011 at 9:06 AM

Well, Ed, I don’t know about you but I blame this on the evil, wine sipping, jet taking Republicans.

MeatHeadinCA on July 14, 2011 at 9:08 AM

Yassir. Think it’ll top 1600 this week? Next week?

petefrt on July 14, 2011 at 9:01 AM

I can only hope so but I’m not about to make predictions. Like anything, I have a trialing stop on my holdings. Things change on a dime and from nowhere these days, so I figure you just have to keep a sharp eye and be nimble enough to bail on a moment’s notice.

MJBrutus on July 14, 2011 at 9:08 AM

“Economic growth here and abroad is slipping, making a 2012 recession a distinct possibility,”

The term ‘distinct possibility’ here means ‘already started’.

Vashta.Nerada on July 14, 2011 at 9:08 AM

I do believe it is high time to bestow on Ben Bernanke the supersized heave-ho out the door on his way under the bus that he so richly deserves.

pilamaye on July 14, 2011 at 9:09 AM

chemman: To be fair, the yen-to-dollar ratio was fixed in the postwar period. Quite a bit of the Japanese economic success had to do with their ability to compete in the export market because of the fixed exchange rate.

Now, of course, this is still traumatic, as last year it was about 110-120 yen to the dollar, no?

Scott H on July 14, 2011 at 9:09 AM

The idiot Eric Holder is doing all he can to ‘reflate’ the housing bubble, by forcing banks to go back to making bad loans: Holder Launches Witch Hunt Against Biased Banks

In several cases, the government has ordered bank defendants to post in all their branches and marketing materials a notice informing minority customers that they cannot be turned down for credit because they receive public aid, such as unemployment benefits, welfare payments or food stamps.

I guess the last crisis wasn’t big enough to accomplish little Bammie’s r-word.

slickwillie2001 on July 14, 2011 at 9:15 AM

Umm why do people think mortgages are an outlier.

People buy homes AFTER they have good financial stability, not before.

Just like businesses hire people AFTER they are doing well and need additional help.

Today’s politicos seem to put the cart before the horse.

DavidM on July 14, 2011 at 9:15 AM

“Then start printing more!”

-Financial expert Barack Obama

Bishop on July 14, 2011 at 9:18 AM

No, the housing market is fine. Moody’s said it bottomed out in 2009.

Fallon on July 14, 2011 at 9:22 AM

Bernanke’s testifying again today at 10 AM.

Cody1991 on July 14, 2011 at 9:22 AM

Liberals will never understand economics. They also never learn from experiences with unintended consequences. “Gee, only ‘rich’ people own homes….let’s make it so that EVERYBODY can own a home.” So Bill Clinton, Barney Frank, Chris Dodd and many more went about trying to do that. By artificially driving demand for homes through the roof, they drove the price of housing artificially through the roof. Liberal Democrats own the housing bubble.

olesparkie on July 14, 2011 at 9:05 AM

And now they apparently don’t want ANYONE to own a home. Tried getting a mortgage lately? Unless you have 20% down and a FICO score over 700, you can forget it! There are rumors that Bank of America is preparing to get out of mortgages entirely. The regulators have made it so that mortgage loan officers can’t make any money and mortgage lenders can’t make any money selling mortgages in the secondary market (which today means to the government.)

And they wonder why housing hasn’t recovered?

rockmom on July 14, 2011 at 9:47 AM

I wonder how much Soros has invested in “growth-leveraged currencies”?

marinetbryant on July 14, 2011 at 9:47 AM

Home prices back to the early 1990′s if

1) Morgage Interest Deduction is reduced and phased out
2) Mortgage rates back to 7% to 9% historical norm
3) FHA is elimilated, we can only hope
4) Fannie and Freddie will now be privatized.

The only reason I can see if it doesn’t go back to early 1990′s is falling dollar and that’s not good.

Oil Can on July 14, 2011 at 9:53 AM

Redistribution.

petefrt on July 14, 2011 at 8:59 AM

That’s exactly what it is.

Got $10,000 in your pocket? Welp if the Feds deficit spend like crazy and then print/devalue money, they are effectively taking your money and spending it.

Your $10,000 ends up with the spending power of $5,000, and all the leftist causes are getting funded like crazy by the Stimulus or whatever else they fund with the printed money. It’s a transfer of buying power without the hassle of actually taxing you.

forest on July 14, 2011 at 10:08 AM

Better put off my plans to retire to S/SE Asia for a few years.

JohnGalt23 on July 14, 2011 at 10:15 AM

“Next” recession? We are still in the same one. We haven’t recovered yet.

NotCoach on July 14, 2011 at 8:58 AM

I keep trying to correct this also, but they are determined to toe the “official” line. It’s disappointing, since the GDP data used by a leftist group is being used to refer the economic situation as a “recession” and that it sorta ended.

The problem there is the GDP data is FAKE because it is skewed by Failbama’s government spending and not just real private sector production.

It doesn’t include accurate unemployment information or even comprehensive and accurate economic information.

It assumes Tarp and all the bailouts actually did anything other than slow the bleeding.

At least Ed has said the only thing the bailouts did was protract the situation. They didn’t fix the actual problem, they patched some SYMPTOMS.

dogsoldier on July 14, 2011 at 10:22 AM

Ed, Please Read This!

You are misusing this chart. It is not adjusted for inflation and doesn’t show the trend continuing from the 70s. Therefore, it doesn’t prove the existence of a housing bubble. Please see this chart extended through 1970 including inflation adjustments here.

That chart (and one after it) proves that The U.S. national housing bubble is completely deflated. However, there are still many local housing bubbles, especially in many Northeast and West Coast metropolitan areas.”

And no, I am not a real estate guy :)

elfman on July 14, 2011 at 10:29 AM

elfman on July 14, 2011 at 10:29 AM

At the low end, housing is at the bottom. The higher up you go the more inflated it still is. Essentially a $200K house is a good buy now since it will cost as much if not lower to rent the same house. A $500K house is a bad buy right now since it costs much less to rent the house than to buy it.

Since there are more $200K houses than $500K houses the overall housing market is fairly close to bottom.

angryed on July 14, 2011 at 11:42 AM

angryed on July 14, 2011 at 11:42 AM

Is the high end rent vs. own cost difference always greater than the low end rent vs. own cost difference, regardless of the over all market?

elfman on July 14, 2011 at 12:10 PM

Is the high end rent vs. own cost difference always greater than the low end rent vs. own cost difference, regardless of the over all market?

elfman on July 14, 2011 at 12:10 PM

Are you asking as a % or in actual $ costs? In actual $ costs it is obviously the case. Renting a $5000 house vs. owning it for $6000 is a bigger difference than renting for $500 vs $600. But as a % in savings, it’s the same. So simply looking it at it in dollars, I think you can say that pretty much that is the case.

There are never absolutes of course, but in general I’d say yes, both the $ and % savings increase as you go higher up the pricing ladder.

angryed on July 14, 2011 at 12:28 PM

Your $10,000 ends up with the spending power of $5,000, and all the leftist causes are getting funded like crazy by the Stimulus or whatever else they fund with the printed money. It’s a transfer of buying power without the hassle of actually taxing you.

forest on July 14, 2011 at 10:08 AM

Bingo. That’s why I believe Øbama‘s intent is to take the country to the brink of hyperinflation. Some days I worry that he wants to push us over it.

petefrt on July 14, 2011 at 12:52 PM

angryed on July 14, 2011 at 12:28 PM

I meant as a ratio of course. I should have said ratio instead of “difference”.

I brought it up because you said, “A $500K house is a bad buy right now since it costs much less to rent the house than to buy it.” I took that to mean that there was something unique to “right now”, such as the rent vs. own cost ratio, that made a $500k home a bad buy now relative to at other times.

elfman on July 14, 2011 at 1:04 PM

No better way to graphically show how the dollar has fallen:

check both the USD and CHF, etc. on the 5 year chart here.

Gold in Swiss francs has gone up about 50%, while gold in USD has almost tripled.

This winter, burning twenties in the fireplace may be cheaper than driving to the store for firewood.

Everyone here DID buy some gold a few years ago at TARP time, right??

fred5678 on July 14, 2011 at 1:27 PM

It’s because there’s too many corporate jets.

John the Libertarian on July 14, 2011 at 2:38 PM

Deflation is only a fear of those whose livelihood depends on inflationary policy.

spmat on July 15, 2011 at 12:12 AM