17 November, 2008

Dumb question...?

Hi - dumb question time.

We Brits are currently feeling pretty smug at the collapse of the pound against the once useless US dollar and by extension the AED. Here is the dumb question,(I'm in AL Ain remember) well two of them - what is maintaining the dollar and what is to stop it, and the AED from heading south again?


slmnhq said...

Your questions aren't dumb. In fact they are very heavily loaded. Washington D. C. is now the finance capital of the world. We had the G20 summit here this past weekend where lots of pretentious types tried not to run around like headless chickens.

Given the new importance of Washington, I think it's safe to assume that the dollar will continue to be strong in the long term. The short-term fluctuations will continue in the mean while.


Mr DtP said...

Thanks slmnhq, yup despite the US economy being somewhat sideways right now I guess it isn't going to fall completely apart in one go. Even so press reports (not GN) seem to give the impression that all is pretty damned bad, so what is supporting it? The Chinese, the Gulf? Yet, in these places one hears that things aren't too bright either, I still have the perhaps erroneous impression that the dollar is currently supported by a house of cards.

Any thoughts and observations from better qualified folk than I most welcome.

redstar said...

I'm no economist, but it's more the pound weakening against the dollar rather than the dollar strengthening against the pound. The Euro exchange rate is still pretty much the same.

For things to return to the way they were, the UK economy needs to have some good news.

I expect things will stay this way for at least a few months to come.

Beware the double-edged sword. When you're back home and sending money back to the UAE to pay off that mortgage, things don't look so rosy...

Duffy said...

The dollar is fiat currency and broadly reflects the confidence in the stability of the US. More specifically, it's value is predicated on monetary policy. That is, how much money is in circulation and how "expensive" that money is. "Expensive" = interest rates as determined by the fed. Fed drops rate money becomes "looser" and "cheaper". Fed increases rate and the opposite occurs. Too loose = devaluation of the dollar. Too tight = slow growth and/or stagflation (c.f. Carter, Jimmah).

The upside to a cheap dollar is cheaper US goods to export (making British goods for example much more expensive) and increased tourism.

FWIW, we had a bunch of Brits come over for The Big Meeting not too long ago and they've been asking about prices of goods. When I directed them to some websites they were agog. Several of them packed suitcases inside suitcases like nesting dolls to carry their stuff back.

Not least of all b/c we have no sales tax in my state.

rosh said...

haha Duffy :) we had a bunch last week from our office in the UK, many of whom practically stayed a weekend to shop half the city! They couldn't BELIEVE, the sale prices for clothes, shoes and electronics. Some didn't mind paying surcharges for all that excess baggage. Even Canadians love shopping in the US the past year or so..

Oops going off topic..

Foreigner at home said...

I am not an economist or understand the markets extensively.

I think the dollar has picked up just because of its unavailablity in the global market. All the markets of the world purchase in dollar. Previous crash dumped the dollars in the market and now because of unavailablity the dollar is sold at a higher exchange rate.

By the way it is the only, or rather was, currency backed by gold. (sounds interesting).

Who decides my buying power with my own hard earned money is a totally different story!

www.hallodubai.com said...

just watch this video about why the US dollar is almost history and will have to be replaced!

Seabee said...

As Redstar said, it's not just the $ moving but other currencies moving too. While the $ may be high against the £ it may at the same time be low against another currency.
If at the same time good economic news comes out of the UK (that's a big if at the moment) but bad comes out of the US, the £ will strengthen and the $ weaken.

Take as much advantage as you can of the good rate at the moment.

Proud Emirati said...

AED will head south again when oil reach $147 ....

Mr DtP said...

Interesting comments all - reflecting bits and pieces I had half absorbed. One for Proud Emirati (and anyone else) with the slump effectively world wide and the Hedge Funders somewhat chastened (?) is oil likely to go back up to silly prices in the near future esp if the new pres goes through with his goal of turning the US onto renewable energy albeit in the mid-long term.

rosh said...

DTP: what is "driving" Oil prices? Surely, not (just) demand?

Farhandxb said...

Proud Emirati: The price of oil not going near 147 in the near future.

Its clear it was supported at $100+ by massive speculation - much like the property market locally. Which explains the sudden pronouncements recently by the authorities here to control brokers / speculation and what happens when one defaults.

In defence of commodities (gold/silver/oil/platinum)-they have been immensely under priced over the past few weeks-so they will head north again-but not the levels we saw earlier this year. With the exception of gold - which has the potential to go far higher because of its 'currency' potential.

The reason for dollar strength is that the dollar and US Treasuries are currently the safest place to park capital - FOR THE TIME BEING. It won’t last-because the US govt. just keeps printing (sic.) more and more of it and theres another crisis lurking behind the treasuries which no one will have confidence in (soon).

Eventually a bank/car industry collapse here or there and/or a major problem with treasury notes will hurl the dollar down.

It may be a few months, may be a couple of years (if the Obamaites can hold it all back for long enough).

There are already clear signs that there is massive manipulation going on by the banks to depress the price of gold-why? Because its the only other 'trusted' reserve to the dollar.

The price of physical gold is already trading at a premium to the futures contract (the DGCX CEO recently commented on Dubai Eye how 'strange' it all was). The US Govt. & supporting cast are worried sick that if the dollar collapses-either Russia or China (and maybe-if they had any guts or a backbone-the Gulf Countries) could launch a currency backed by gold, oil + a basket of other currencies. It would immediately become a world reserve currency easily replacing the worthless dollar.

That all said-use the dirham buying power now to invest overseas (locally-the stock market is soon to hit bargain basement (Emaar at 2.50 is not too bad-maybe could go lower, DP World at 27 cents is a bargain) - property has a long way (down) to go).

And when the dollar weakens (sooner rather than later) - my guess is that we'll still be pegged to that - soon to be - worthless currency. (The UAE has one of the worlds highest M3 money supply-i.e. we print a load of money - but the US is far higher and doesn’t even publish this statistic any more).

So apply some supply/demand logic-if there is a LOT of something around-what happens to its value?

Mr DtP said...

Excellent post FarhandDXB (and others). I shall be shifting those Dirhams.

Dubai Warrior said...

Bottom line is that dollar is NOT gonna stay high. It will slide surely and might not be even slowly on a new decline against all the other currencies.

Some reasons were explained including the M3 money supply figures, but more importantly those useless bailouts and the flood of rescue packages is nothing but a direct distruction of currency value.


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