Thread: Iraq/Dinar News until 5/23/07 Midnight CST

AND GETS STARTED ON CABINET RESHUFFLE...
Prime Minister al-Maliki has begun to host meetings to discuss appointing new members to his cabinet, Iraqi media reported on May 12. Al-Maliki promised to reshuffle the cabinet months ago to replace unqualified or ineffective ministers. He will also replace six ministers aligned with Shi'ite cleric Muqtada al-Sadr who resigned their positions on April 16 (see "RFE/RL Newsline," April 16, 2007). Government spokesman Ali al-Dabbagh told Al-Iraqiyah television in a same-day interview that the final phase of the selection process is under way. He stressed that the new ministers will be competent, but added: "I cannot reveal the names before they are submitted to parliament.... These names are very likely to change in view of the talks held between the prime minister and various blocs," signaling that the appointments may still be based on sectarian quotas. Asked about possible amendments to the constitution, al-Dabbagh said: "There is an agreement among the political blocs on several principles [and] there are certain issues that need extra time and effort. In my opinion, the major amendments will be introduced on May 15." Other issues that require further discussion will be referred to parliament, he added. KR

AS SUNNI ARAB LEADER CRITICIZES CABINET PROPOSALS
Salih al-Mutlaq, the head of the Iraqi Front for National Dialogue, criticized the proposed cabinet reshuffle, telling reporters in Amman on May 11 that the nominations reflect a rearrangement of sectarian quotas, Al-Sharqiyah television reported on May 12. He said the majority of the nominees hail from two parties known for promoting sectarian quotas in Iraq. The Amman-based "Al-Arab al-Yawm" reported that al-Mutlaq called Prime Minister al-Maliki's government "a failure," and said it should be replaced by a new political process that could save Iraq. According to the report, the two parties al-Mutlaq criticized were al-Maliki's Islamic Al-Da'wah Party and the Supreme Council for the Islamic Revolution in Iraq, now known as Supreme Islamic Iraqi Council. He called on the Iraqi Accordance Front to stand by its threat to withdraw from the government, and praised the decision by Shi'ite political figures aligned with cleric Muqtada al-Sadr as well as by the Shi'ite Al-Fadilah Party to withdraw from the government. KR

Tuesday, May 15, 2007. Issue 3656.
U.S. Troops Stop 5 Sadr Lawmakers
The Associated Press
BAGHDAD -- U.S. soldiers on Monday stopped five lawmakers loyal to anti-U.S. Shiite cleric Moqtada al-Sadr as they were walking to a parking lot inside Baghdad's fortified Green Zone, one of the lawmakers said.

A witness said the soldiers drove up in a sport utility vehicle marked "police" and stopped the lawmakers, including two women, just outside the building where they attended a session of the 275-seat parliament.

The soldiers asked the three male lawmakers to hand over the passes giving them access to the Green Zone, home to Iraq's parliament as well as its government offices and the U.S. and British embassies.

The lawmakers obliged, but an argument ensued. The U.S. troops cleared the area as the argument was in progress, but one of the lawmakers later said the dispute lasted about 30 minutes and ended with the soldiers giving back the passes.

"You can call [top U.S. commander in Iraq] General [David] Petraeus on the phone and demand an apology," one lawmaker, Saleh al-Aujaili, quoted a soldier as saying. "I told him that the Sadrist bloc has no wish to speak with the American occupiers," he said.

A U.S. military spokesman said he had no information on the incident.

The parliament is expected this week to debate a draft bill sponsored by the 30 Sadrist lawmakers for a timetable for the withdrawal of foreign troops from Iraq and a freeze on their existing levels.

Iraq's harsh realities disguise its lucrative opportunities


Monday, May 14, 2007

The American involvement in Iraq is just reaching the top of the roller coaster before starting on the downslope. The differences over timing are measured in months, and not many months at that.

So what is the likely future of Iraq? And, since this is the Financial Times, is there any money to be made or lost from that future?

There are a lot of people with opinions about Iraq, but few who actually know what is going on.

One of those is Ali Allawi, whom I met in Baghdad when he was defence minister, and who subsequently was finance minister, and a key figure in the renegotiation of Iraq's sovereign debt one of the few well executed postwar operations in Iraq.

Presently, Mr Allawi lives most of the time in London, and is the chairman of a company that has partnered in the development of Progas, a Karachi-based liquefied petroleum gas importer and distributor. Dr Allawi, 60, was educated at the Massachusetts Institute of Technology and Harvard Business School, and spent his early career at the World Bank. His family is at the centre of the Iraqi elite, in particular of the Shi'a community. They had left Iraq after the rise of the Ba'ath party and Saddam.

He has just published a book, The Occupation of Iraq, which I recommend to anyone interested in an unvarnished account of the first phase of this war and what followed.

He remains, formally, an adviser to Nouri Al-Maliki, prime minister, but as he says: "I am dormant as an adviser". I asked Mr Allawi how the situation has developed since he finished the book.

"The symbolic significance of the so-called national unity government is that it keeps the hope alive that some basic agreement can be reached in key issues. What is holding it together is the presence of the US in force. Now this is a quixotic venture that has reached the end of its useful life.

"The current administrative structure is incapable of managing the state or reconstruction. The way the ministries are packed with deadwood, makes it next to impossible to have an effective government."

A key problem is what Mr Allawi calls the "human resources gap". There just are not many people who know what they are doing.

"The government doesn't recognise that they have [this gap]. There are all sorts of people descending on Baghdad from the Iraqi diaspora, not just carpetbaggers and ne'er do wells, but mainly looking for jobs. If you bring in people who pretend to manage and cover up mismanagement with oil money, then you get policies that beggar belief."

What comes next?

"We haven't yet reached the exhaustion point [with the war] in Iraq, but I don't think we are far from the bottom. The only way it can go further down is if there is overt support for the insurgency, as a state policy [of neighbouring countries]."

What follows an American pullback? "That will strengthen the central government's control over the army and security forces, but it will be a sectarian central government that will drive the Sunni into far greater hostility."

But that fight will have its limits. "That kind of army will not be able to conquer Sunni territory, like Mosul. In time it will be seen on both sides that the state cannot control the Sunni parts, and it will be seen on the part of the insurgents and their backers that attempting to take back control of the state is futile."

Mr Allawi believes that outsiders could have a role in negotiating and securing an eventual peace. "If there is an Iraqi political settlement, it could take the form of a treaty that not only binds the local contenders, but the region, maybe one in which the distribution of oil revenues is insulated from a capricious central government."

For portfolio investors, Mr Allawi believes the rescheduled foreign debt is secure. "The commercial debt renegotiation was a good deal for Iraq," which any successor governments will want to keep in place.

"The total amount of remaining debt to the Gulf states is not as much as originally believed. Net of interest, it is in the $20-$25bn range. If that is renegotiated on similar terms, stretched over many years, that is not a significant drain." The 2028 issue, currently trading in the 64-65 range, yields about 10 per cent, or 520 off the US Treasury curve. That's a little lower yield than Ecuador, but, I would agree with Mr Allawi,good value.

As for commercial interests, Mr Allawi says: "I think that if you are in a fast-moving consumer goods business, for example, Iraq has a lot of opportunities. There is a lot of cash there, and a lot of resources. This is a good time to set up relationships for establishing a presence in Iraq, either with local or regional partners."

I can vouch for the cash-richness of the country, and for the size and skills of a diaspora that is just over the horizon. Disastrous as Iraq's situation seems now, we're probably within a year of its worst moment, and post-conflict recoveries can be remarkably quick.

[email protected]

John Dizard


© Copyright The Financial Times Ltd 2007

Indian firms to tie with Iraq on oil



Indian public sector firm Oil and Natural Gas Corporation Videsh Ltd. (OVL) and a private sector firm Reliance Industries Ltd (RIL) could soon tie up to strike a strategic relationship for overseas gas and oil projects, national daily, The Hindu, reported Monday.

The newspaper reported that OVL is keen to revive talks with Iraq to get a stake in its Tuba oilfield. The newspaper quoted an unnamed official from OVL as saying that they were open to more of such partnerships with RIL.

It is reported that OVL had already completed negotiations with the Iraqi Government for the stake in the oilfield but the deal could not reach its final stage since the then Saddam government got overthrown at the time.

Had that deal gone through, OVL and RIL would have held 30 percent stake each in the oilfield. The remaining 40 percent stake would have been held by Algerian firm Sonatrach.

The newspaper reported that Indian Petroleum Minister Murli Deora, during his talks with the Iraqi oil Minister Hussain Al Shahristani, at the Second Asian Ministerial Energy Roundtable in Riyadh recently, had raised the issue of OVL's participation in Iraq's upstream oil sector.

The newspaper said the OVL would now resume talks with Iraq on the issue.

Indian oil firms are under a mandate to seek oil equity abroad since the country is heavily dependent on imports.

Source: Xinhua

Iraq to push for Indian refineries

PTI[ MONDAY, MAY 14, 2007 09:30:16 PM]


NEW DELHI: Iraq will press Indian firms to set up refineries there during a four-day visit to India by Oil Minister Hussain al-Shahristani later this month, an Iraqi official said on Monday.

"We will invite India to establish refineries in Iraq ... the capacity of our refineries is very limited," said Muayad Hussain, Iraq's charge d'affaires in India. Shahristani is due in India from 24-27 May.

Iraq has a refining capacity of 603,000 barrels per day. It produces 477,000 bpd of refined products and consumption stands at 514,000 bpd, according to the OPEC Web site.

During a visit to the Saudi capital Riyadh earlier this month, Indian Oil Minister Murli Deora met Shahristani. The participation of Indian state explorer Oil and Natural Gas Corp and other firms in Iraq's oil sector was raised.

The Iraqi minister invited Indian Oil Corp and Engineers India Ltd to consider entering the downstream sector. Hussain said in New Delhi that the exploration of the Tuba oil field in southern Iraq could also feature in talks between the two countries.

ONGC, India's Reliance Industries Ltd and Algeria's Sonatrach tried in 2000 to secure Tuba. Iraq is expected to enact an oil law by May-end that would allow its various regions to negotiate oilfield contracts with foreign investors.

Baghdad desperately needs foreign investment to revive its shattered economy, which relies heavily on oil export revenues. The country straddles the world's third largest oil reserves. Decades of war, sanctions, under-investment and now widespread violence and sabotage have left it critically short of fuel. It has to import nearly half of all its gasoline.

Iraq has eight refineries, none of which were damaged during the US-led invasion in 2003. Oil officials say that Iraq's refineries are operating at only 50-75 per cent of capacity, forcing Baghdad to import most of its fuel.

Middle East News
EU pledges support for helping Iraq with reform plan
By DPA
May 14, 2007, 12:23 GMT



Brussels - The European Union on Monday pledged support for the implementation of an ambitious international plan aimed at helping Iraq's economy, saying the pact was central for developing relations between Iraq and its partner countries.

EU foreign ministers said the recent launch of the International Compact for Iraq was 'encouraging and hopefully will contribute to an improvement of the situation in Iraq.'

The broad-based contract with the country commits the international community to substantial aid in exchange for a promise of unity in Iraq within five years.

EU ministers commended Iraq for 'the ambitious commitments it has made' in the plan to promote reforms in politics, security, economics and social affairs.

'The implementation of these commitments will be central in developing co-operation between Iraq and all its international partners,' ministers said after a meeting in Brussels.

Countries worldwide, but in particular states in the region, 'have a responsibility to support and promote the difficult process of national reconciliation and stabilization in Iraq, and to prevent outside interference that could undermine it,' they said.

The International Compact for Iraq includes debt reduction and aid packages but also requires the Iraqi government to take stronger steps to end sectarian violence and move toward political reconciliation between rivalling Shiites and Sunnis.

EU ministers also called for 'effective' follow-up action to the Iraq conference in Egypt earlier this month, including work in the areas of security, refugees and energy.

The Sharm el-Sheikh meeting brought together top diplomats from 21 countries, including Iraq's neighbouring states, the five permanent members of the United Nations Security Council and members of the G8 club of wealthy nations.

The International Compact for Iraq includes debt reduction and aid packages but also requires the Iraqi government to take stronger steps to end sectarian violence and move toward political reconciliation between rivalling Shiites and Sunnis.

oh, yeah? and what else might they have required of Iraq??hmm, ?

Ask the expert: US dollar

Published: May 11 2007 11:56 | Last updated: May 14 2007 15:24


How far will the dollar continue to slide? Marc Chandler, global head of currency strategy at Brown Brothers Harriman, says the trend of the weakening US currency has now become entrenched, even if it is driven by cyclical interest rate considerations rather than ”structural over-reach”.

But he warns that is not necessarily good for US stocks, or even specifically for multinationals, because the same thing that is weighing on the US dollar - slowing growth - ultimately undermines earnings growth in general. Meanwhile, the lofty level of the pound against the dollar need not mean the British currency has peaked, although Mr Chandler thinks sterling is likely to be weaker in a few months’ time.
More background reading
Mr Chandler answers your questions:
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Q: Would the US economy be better off if a gold standard was adopted and the Fed offices on Constitution Avenue were used as an abode for okapis?
John D, New York
MC: There are some people who still think the move off the gold standard and the advent of fiat money marks the beginning of the end. I disagree. What is so special about gold that it should determine the supply of money, economic growth, and people’s life choices?
There are, I think theoretical and practical difficulties of returning to a gold standard. Since the business cycle pre-dates the Federal Reserve, I think it is a bit disingenuous to blame them for business cycles in general. Over time, especially for the last 25 years or so, the US business cycle has become longer and flatter. This may be partly a reflection of the learning curve of policy makers. I think the lesson from the 1920s-1940s is that the vagaries of the business cycle could undermine people’s faith in democracy and capitalism.
The gradual deregulation of the capital markets allows the prices of money - interest rates, currencies--to act as shock absorbers so the real economy doesn’t have to. The lesson learned from the series of financial crises from 1995 through 2001 is that the volatility of the capital markets themselves could be so severe as to also put the system at risk. There may be other animals on Constitution Ave in Washington DC but okapis are not to be seen.
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Q: What advice would you give to an independent trader who is looking into delving into exchange rate modelling and forecasting as a way of supplementing technical and fundamental analysis.
Ruwelly Shenje, Galway, Ireland
MC: As much as I believe that the democratisation of the capital markets is an under-appreciated aspect of the US economic prowess, I think under-capitalised investors are at a significant disadvantage in the foreign exchange market. Banks do not make money consistently by out-guessing the market. Rather it is through the spread (buying wholesale selling retail) and knowing the order flow that money is made. Banks have scaled by proprietary trading operations.
Hedge funds have done poorly in the foreign exchange market is recent years and yet retail players seem to have increased markedly. I am suspicious of the large leveraging that some retail outlets offer. I am suspicious of businesses in that space that take the opposite position from customers as opposed to acting simply as a broker. Trading is difficult, but it requires a different set of skills than analysis and forecasting and the two should not be confused.
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Q: In the recent past, many central banks around the world have declared their desire to diversify out of dollars into other currencies. There is much talk about the greenback losing its status as the worlds reserve currency. Do you see this happening? And if so, what other currencies could possibly pick up the slack from a dollar retreat?
Finally, in 10 years out, what broad percentage make-up of the currencies of central bank reserve portfolios would you estimate and how big of a role do you see the Yuan playing in these portfolios?
Kamil Kolacaek, San Jose, CA
MC: There is indeed much talk about the diversification of reserves. And to some extent it does appear to be taking place, but not in the way that is often understood. The most authoritative source is the IMF and BIS. The data however, is limited because not all central bank report the composition of their reserves. However of the part of reserves whose composition is known, the dollar’s share has slipped marginally. But this has not come because of dollar sales. Instead, more euros and sterling have been bought. And the valuation adjustment has also been important.
If a central bank had reserves in 2000 split equally between euros and dollars, for example, the more than 50 per cent appreciation of the euro against the dollar since then would result in a greater percentage of euros than dollars, when expressed in terms of dollars, as is often the case. Reserve diversification need not be a zero-sum exercise during periods, like the present, of reserve accumulation.
The Chinese yuan may one day be a reserve currency, but it is not yet. In fact, yuan is not freely convertible currency. Going forward I think the dollar will remain the most important reserve asset and the euro number two. In 10-years from now, I would be surprised if the yuan has more than a few percentage points of reserves. As Japan’s experience demonstrates, a large economy is not a necessary and sufficient cause of having an important reserve currency.
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Q: What is your take on the future of the Iraqi dinar?
John Anderson, Florida
MC: The future of the dinar rests on the future on Iraq. A couple of years ago, some reporters called me and asked me to comment on someone’s call that the Iraqi dinar was going to appreciate. That all the bad news was known. I think a purchase of Iraqi dinar on some hope is not an investment but a lottery ticket. The key to an investment seems to be risk management. How is that risk to be managed? It also begs the question of how markets work.
They are not simply the withdrawal of the government. Just like strong fences make good neighbours, strong markets require a government that has a monopoly on the use of force, transparent rules, and strong regulation. As Adam Smith and David Riccardo appreciated, it is really about political economy, not just economy.
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Q: How do you see in the short-term the dollar will move against the UK pound.
Amjad Kamhawi, Berkshire
MC: Sterling is benefiting from the weak US dollar environment, BOE rate hike past and prospective, and demand for reserve purposes. I do not think sterling has topped, but I do think valuation is getting stretched and that sterling will be trading lower by the end of summer. Assuming the euro heads toward $1.40, I envisage sterling trading potentially as high as $2.06.
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Q: In the Feb global market rout, carry trades were rapidly unwound as seen in the pound/Japanese yen depreciation. I understand that the price of pound/Japanese yen = pound/dollar x dollar/Japanese yen. In addition to the pound/Japanese yen depreciation, as markets corrected the dollar depreciated vs. the Japanese yen and appreciated vs. the Pound. Why exactly does money flow like this when carry trades unwind and global markets ”correct”?
And secondly, how widespread is hedge fund (or other institutional) borrowing of the Japanese yen to fund other investments and to what extent does this influence exchange rates? Would you say that the cheap Japanese yen is the major source of global liquidity?
Dr. Matthew Berman
MC: Carry trades feature not only short yen positions, but short Swiss franc positions and arguably short Taiwanese dollar and short Czech positions as well. Sometimes it appears that the dollar, yen and Swiss franc move against the euro and sterling in sync. It is difficult to determine the size of the yen carry trade. Should it include Japanese investors who sell yen and buy higher yielding foreign assets? Should it include sovereigns that issue yen-denominated bonds?
How representative is the IMM data, where the speculators have a large net short yen and Swiss franc position. The speculative community has not been net long these two low yielding currencies since last June. What about options ? I do think the cheap yen, the capital outflows from Japan, and related issues make Japan one of the sources of global liquidity even though there measures of money supply growth are weak.
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Q: Please explain how the Japanese yen and BoJ policies are used to maintain dollar value and where/how the internal Japanese interest rate and Japanese inflation is affecting US economy?
Henni Laurila, Oslo
MC: I would disagree with your premise that Japanese policies are used to maintain the dollar’s value. I would suggest that while the BoJ is determined to normalise monetary conditions, it hasn’t yet and with consumer price inflation nearly non-existent, there is limited scope for it to move.
The driving down of interest rates - destroying the return on domestic savings encourages Japanese investors to move their money offshore and in effect re-cycle the current account surplus, which in previous periods necessitated intervention. The low rates in Japan and the exodus of savings appear to be one of the sources of global liquidity and at least on the margins supportive of global asset prices.
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Do you think the dollar still in correlation with the gold, any other commodities or currencies?
Krasimir Stoyanov, London
MC: There seems to always be a correlation between the dollar and commodities. The issue is whether the correlation is robust and stable. This does not seem to be the case. If one has a view on gold or oil, one should take such a position as directly as possible and not to confuse a dollar-play for a commodity play.
There are many factors outside of commodities that impact the dollar’s price. Some other currencies, perhaps like the Chilean peso, may be more influenced by a single commodity. This is not to say that commodity prices are not important. Indeed, I attach much significance to the positive terms of trade shock for many commodity producers. For the first time in nearly a century, commodity prices appear to be rising compared to the price of manufactured goods. This is an important, even if under-appreciated, factor in the the strong performance of emerging market currencies and the Australian and New Zealand dollars.
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Q: With so many dollar bears, I have to wonder if we’re not near some sort of bottom.
Nadeem Walayat, Sheffield
MC: Sometimes, the crowd is right. The key is timing. I am sympathetic with the view, but am concerned that the dollar bears are still in the driver’s seat. The key to making money in the market is not, it appears, being right more often, but disciplined management risk. To pick a bottom in the dollar may be seductive, but when and where does one admit one is wrong, that seems to be the most important question. $1.3680 the euro high from April 27? $1.40 - a nice round number or $1.45 the rough equivalent of the old Deutschemark record low in 1995?
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Q: Will the weak dollar, its low rates, coupled to its companion twin deficits force US rates up in order to continue the need to fund the budget deficit?
Brad Breuer, San Antonio, Texas
MC: The Federal Reserve does not appear to place much weight on the US dollar’s exchange rate when setting monetary policy, though at times of course it is more significant than other times.
The market does not seem to be demanding higher interest rates from the US as there has not been an exit from US assets. The US dollar has born the brunt of the adjustment of the narrowing of interest rate differentials-say between the US and the Eurozone. The TIC data suggests that the US c/a deficit continues to getting funded rather smoothly and contrary to talk about central banks selling dollars, central banks hold more dollars than ever before.
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Q: In today’s world what would be the ramifications of continued US trade deficits, but with a balanced budget?
Robert McGill, Williamstown, Massachusetts
MC: The social sciences are often criticised for not conducting experiments like the natural sciences. But we have experience of large US trade deficits and a balanced budget. This happened in the latter years of Clinton’s presidency. The dollar was strong from 1995-2000.
I think that may have played a role, but a more compelling explanation is probably the flow into the US equity market form both foreign investors and domestic investors keeping more of their money at home. I think that the US trade deifict is sustainable because the function is fills - absorbing the world’s excess production and savings - has few other near-term practical solutions.
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Q: Anyone can see that the dollar weakness trend is becoming exhausted. There is only so much selling traders will do until even weak US economic data has little or no effect on the dollar.
As soon as the Fed hikes the interest rate or institutes a higher bank reserve policy the dollar will catapult in value, speculators will be wiped out of all markets, and the US economy will go into an even deeper recession (possibly depression).
My question is: Why do groups like J.P. Morgan, Goldman Sachs, and Brown Brothers Harriman feel the need to sell positive outlooks? Are the general public being set up for the Big Fall?
James, US
MC: Generally speaking market economists use two main explanatory models for the US dollar. External balances and interest rate differentials. Many policy makers, including form the IMF and World Bank have argued that the US current account deficit is one of the largest risks facing the world economy. Others, like myself, place greater emphasis on interest rate differentials and the relative slopes of yield curves in explaining and forecasting the dollar. Few I think would agree that economic growth is merely an effect of cheap money and loose credit.
While I have argued that the market is confusing the price of money with quantity (e.g. M3 in the Eurozone is growing nearly twice as fast as it was when the ECB first began raising interest rates in Dec 2005), I don’t think currency movement can be simply reduced to relative growth rates in money supply. Ultimately, I think reasonable people can differ in their analysis and it does not mean an deception. As much as one believes the dollar will fall and sells it, there is some one equally enthusiastic about buying it from you.
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Q: How do you view dollars against Indian rupees for the next 6 months to one year. Ajitabh Ajitabh, Ranjan
MC: The Indian rupee appears poised to continue to strengthen against the dollar in the coming months. Officials seem more tolerant of the INR rise as it helps contain price pressures. Foreign investors are attracted to direct and portfolio investment in India. The currency has already appreciated by more than 8.25 per cent against the dollar this year. A break of INR40, could see a move toward INR35, but officials are particularly sensitive to when the appreciation begins cutting into export growth. Of course, India is also benefiting from the global investment climate that I would characterise by citing low volatility, high liquidity and easy credit conditions.
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Background reading
Mr Chandler answers your questions on the forces behind the world’s currencies. Is the dollar destined to slide further as European growth outpaces the US? Why is sterling so strong? When and why should China float its currency, and what is the right level? Are speculative ”carry trades” artifically weakening the yen as hedge funds borrow in Japan to finance risky investments elsewhere, or are other fa0ctors also at work? Why are currency moves so notoriously difficult to predict?
Mr Chandler is a widely-recognised commentator on the foreign exchange market. He has been analysing, writing and talking about currencies for more than 20 years. His current research projects include global imbalances, Islamic finance, and the relationship between savings, investment and growth. Mr Chandler joined BBH in October 2005 after stints as chief currency strategist for HSBC Bank USA and Mellon Bank, and since the early 1990s has taught classes on International Political Economy at New York University, where he is an associate professor.

Just got this in an email.

Originally Posted by notazbad2000

Ask the expert: US dollar

Published: May 11 2007 11:56 | Last updated: May 14 2007 15:24


How far will the dollar continue to slide? Marc Chandler, global head of currency strategy at Brown Brothers Harriman, says the trend of the weakening US currency has now become entrenched, even if it is driven by cyclical interest rate considerations rather than ”structural over-reach”.

But he warns that is not necessarily good for US stocks, or even specifically for multinationals, because the same thing that is weighing on the US dollar - slowing growth - ultimately undermines earnings growth in general. Meanwhile, the lofty level of the pound against the dollar need not mean the British currency has peaked, although Mr Chandler thinks sterling is likely to be weaker in a few months’ time.
More background reading
Mr Chandler answers your questions:
.................................................. .................................................. ........................................
Q: Would the US economy be better off if a gold standard was adopted and the Fed offices on Constitution Avenue were used as an abode for okapis?
John D, New York
MC: There are some people who still think the move off the gold standard and the advent of fiat money marks the beginning of the end. I disagree. What is so special about gold that it should determine the supply of money, economic growth, and people’s life choices?
There are, I think theoretical and practical difficulties of returning to a gold standard. Since the business cycle pre-dates the Federal Reserve, I think it is a bit disingenuous to blame them for business cycles in general. Over time, especially for the last 25 years or so, the US business cycle has become longer and flatter. This may be partly a reflection of the learning curve of policy makers. I think the lesson from the 1920s-1940s is that the vagaries of the business cycle could undermine people’s faith in democracy and capitalism.
The gradual deregulation of the capital markets allows the prices of money - interest rates, currencies--to act as shock absorbers so the real economy doesn’t have to. The lesson learned from the series of financial crises from 1995 through 2001 is that the volatility of the capital markets themselves could be so severe as to also put the system at risk. There may be other animals on Constitution Ave in Washington DC but okapis are not to be seen.
.................................................. .................................................. ........................................
Q: What advice would you give to an independent trader who is looking into delving into exchange rate modelling and forecasting as a way of supplementing technical and fundamental analysis.
Ruwelly Shenje, Galway, Ireland
MC: As much as I believe that the democratisation of the capital markets is an under-appreciated aspect of the US economic prowess, I think under-capitalised investors are at a significant disadvantage in the foreign exchange market. Banks do not make money consistently by out-guessing the market. Rather it is through the spread (buying wholesale selling retail) and knowing the order flow that money is made. Banks have scaled by proprietary trading operations.
Hedge funds have done poorly in the foreign exchange market is recent years and yet retail players seem to have increased markedly. I am suspicious of the large leveraging that some retail outlets offer. I am suspicious of businesses in that space that take the opposite position from customers as opposed to acting simply as a broker. Trading is difficult, but it requires a different set of skills than analysis and forecasting and the two should not be confused.
.................................................. .................................................. ........................................
Q: In the recent past, many central banks around the world have declared their desire to diversify out of dollars into other currencies. There is much talk about the greenback losing its status as the worlds reserve currency. Do you see this happening? And if so, what other currencies could possibly pick up the slack from a dollar retreat?
Finally, in 10 years out, what broad percentage make-up of the currencies of central bank reserve portfolios would you estimate and how big of a role do you see the Yuan playing in these portfolios?
Kamil Kolacaek, San Jose, CA
MC: There is indeed much talk about the diversification of reserves. And to some extent it does appear to be taking place, but not in the way that is often understood. The most authoritative source is the IMF and BIS. The data however, is limited because not all central bank report the composition of their reserves. However of the part of reserves whose composition is known, the dollar’s share has slipped marginally. But this has not come because of dollar sales. Instead, more euros and sterling have been bought. And the valuation adjustment has also been important.
If a central bank had reserves in 2000 split equally between euros and dollars, for example, the more than 50 per cent appreciation of the euro against the dollar since then would result in a greater percentage of euros than dollars, when expressed in terms of dollars, as is often the case. Reserve diversification need not be a zero-sum exercise during periods, like the present, of reserve accumulation.
The Chinese yuan may one day be a reserve currency, but it is not yet. In fact, yuan is not freely convertible currency. Going forward I think the dollar will remain the most important reserve asset and the euro number two. In 10-years from now, I would be surprised if the yuan has more than a few percentage points of reserves. As Japan’s experience demonstrates, a large economy is not a necessary and sufficient cause of having an important reserve currency.
.................................................. .................................................. ........................................
Q: What is your take on the future of the Iraqi dinar?
John Anderson, Florida
MC: The future of the dinar rests on the future on Iraq. A couple of years ago, some reporters called me and asked me to comment on someone’s call that the Iraqi dinar was going to appreciate. That all the bad news was known. I think a purchase of Iraqi dinar on some hope is not an investment but a lottery ticket. The key to an investment seems to be risk management. How is that risk to be managed? It also begs the question of how markets work.
They are not simply the withdrawal of the government. Just like strong fences make good neighbours, strong markets require a government that has a monopoly on the use of force, transparent rules, and strong regulation. As Adam Smith and David Riccardo appreciated, it is really about political economy, not just economy.
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Q: How do you see in the short-term the dollar will move against the UK pound.
Amjad Kamhawi, Berkshire
MC: Sterling is benefiting from the weak US dollar environment, BOE rate hike past and prospective, and demand for reserve purposes. I do not think sterling has topped, but I do think valuation is getting stretched and that sterling will be trading lower by the end of summer. Assuming the euro heads toward $1.40, I envisage sterling trading potentially as high as $2.06.
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Q: In the Feb global market rout, carry trades were rapidly unwound as seen in the pound/Japanese yen depreciation. I understand that the price of pound/Japanese yen = pound/dollar x dollar/Japanese yen. In addition to the pound/Japanese yen depreciation, as markets corrected the dollar depreciated vs. the Japanese yen and appreciated vs. the Pound. Why exactly does money flow like this when carry trades unwind and global markets ”correct”?
And secondly, how widespread is hedge fund (or other institutional) borrowing of the Japanese yen to fund other investments and to what extent does this influence exchange rates? Would you say that the cheap Japanese yen is the major source of global liquidity?
Dr. Matthew Berman
MC: Carry trades feature not only short yen positions, but short Swiss franc positions and arguably short Taiwanese dollar and short Czech positions as well. Sometimes it appears that the dollar, yen and Swiss franc move against the euro and sterling in sync. It is difficult to determine the size of the yen carry trade. Should it include Japanese investors who sell yen and buy higher yielding foreign assets? Should it include sovereigns that issue yen-denominated bonds?
How representative is the IMM data, where the speculators have a large net short yen and Swiss franc position. The speculative community has not been net long these two low yielding currencies since last June. What about options ? I do think the cheap yen, the capital outflows from Japan, and related issues make Japan one of the sources of global liquidity even though there measures of money supply growth are weak.
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Q: Please explain how the Japanese yen and BoJ policies are used to maintain dollar value and where/how the internal Japanese interest rate and Japanese inflation is affecting US economy?
Henni Laurila, Oslo
MC: I would disagree with your premise that Japanese policies are used to maintain the dollar’s value. I would suggest that while the BoJ is determined to normalise monetary conditions, it hasn’t yet and with consumer price inflation nearly non-existent, there is limited scope for it to move.
The driving down of interest rates - destroying the return on domestic savings encourages Japanese investors to move their money offshore and in effect re-cycle the current account surplus, which in previous periods necessitated intervention. The low rates in Japan and the exodus of savings appear to be one of the sources of global liquidity and at least on the margins supportive of global asset prices.
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Do you think the dollar still in correlation with the gold, any other commodities or currencies?
Krasimir Stoyanov, London
MC: There seems to always be a correlation between the dollar and commodities. The issue is whether the correlation is robust and stable. This does not seem to be the case. If one has a view on gold or oil, one should take such a position as directly as possible and not to confuse a dollar-play for a commodity play.
There are many factors outside of commodities that impact the dollar’s price. Some other currencies, perhaps like the Chilean peso, may be more influenced by a single commodity. This is not to say that commodity prices are not important. Indeed, I attach much significance to the positive terms of trade shock for many commodity producers. For the first time in nearly a century, commodity prices appear to be rising compared to the price of manufactured goods. This is an important, even if under-appreciated, factor in the the strong performance of emerging market currencies and the Australian and New Zealand dollars.
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Q: With so many dollar bears, I have to wonder if we’re not near some sort of bottom.
Nadeem Walayat, Sheffield
MC: Sometimes, the crowd is right. The key is timing. I am sympathetic with the view, but am concerned that the dollar bears are still in the driver’s seat. The key to making money in the market is not, it appears, being right more often, but disciplined management risk. To pick a bottom in the dollar may be seductive, but when and where does one admit one is wrong, that seems to be the most important question. $1.3680 the euro high from April 27? $1.40 - a nice round number or $1.45 the rough equivalent of the old Deutschemark record low in 1995?
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Q: Will the weak dollar, its low rates, coupled to its companion twin deficits force US rates up in order to continue the need to fund the budget deficit?
Brad Breuer, San Antonio, Texas
MC: The Federal Reserve does not appear to place much weight on the US dollar’s exchange rate when setting monetary policy, though at times of course it is more significant than other times.
The market does not seem to be demanding higher interest rates from the US as there has not been an exit from US assets. The US dollar has born the brunt of the adjustment of the narrowing of interest rate differentials-say between the US and the Eurozone. The TIC data suggests that the US c/a deficit continues to getting funded rather smoothly and contrary to talk about central banks selling dollars, central banks hold more dollars than ever before.
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Q: In today’s world what would be the ramifications of continued US trade deficits, but with a balanced budget?
Robert McGill, Williamstown, Massachusetts
MC: The social sciences are often criticised for not conducting experiments like the natural sciences. But we have experience of large US trade deficits and a balanced budget. This happened in the latter years of Clinton’s presidency. The dollar was strong from 1995-2000.
I think that may have played a role, but a more compelling explanation is probably the flow into the US equity market form both foreign investors and domestic investors keeping more of their money at home. I think that the US trade deifict is sustainable because the function is fills - absorbing the world’s excess production and savings - has few other near-term practical solutions.
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Q: Anyone can see that the dollar weakness trend is becoming exhausted. There is only so much selling traders will do until even weak US economic data has little or no effect on the dollar.
As soon as the Fed hikes the interest rate or institutes a higher bank reserve policy the dollar will catapult in value, speculators will be wiped out of all markets, and the US economy will go into an even deeper recession (possibly depression).
My question is: Why do groups like J.P. Morgan, Goldman Sachs, and Brown Brothers Harriman feel the need to sell positive outlooks? Are the general public being set up for the Big Fall?
James, US
MC: Generally speaking market economists use two main explanatory models for the US dollar. External balances and interest rate differentials. Many policy makers, including form the IMF and World Bank have argued that the US current account deficit is one of the largest risks facing the world economy. Others, like myself, place greater emphasis on interest rate differentials and the relative slopes of yield curves in explaining and forecasting the dollar. Few I think would agree that economic growth is merely an effect of cheap money and loose credit.
While I have argued that the market is confusing the price of money with quantity (e.g. M3 in the Eurozone is growing nearly twice as fast as it was when the ECB first began raising interest rates in Dec 2005), I don’t think currency movement can be simply reduced to relative growth rates in money supply. Ultimately, I think reasonable people can differ in their analysis and it does not mean an deception. As much as one believes the dollar will fall and sells it, there is some one equally enthusiastic about buying it from you.
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Q: How do you view dollars against Indian rupees for the next 6 months to one year. Ajitabh Ajitabh, Ranjan
MC: The Indian rupee appears poised to continue to strengthen against the dollar in the coming months. Officials seem more tolerant of the INR rise as it helps contain price pressures. Foreign investors are attracted to direct and portfolio investment in India. The currency has already appreciated by more than 8.25 per cent against the dollar this year. A break of INR40, could see a move toward INR35, but officials are particularly sensitive to when the appreciation begins cutting into export growth. Of course, India is also benefiting from the global investment climate that I would characterise by citing low volatility, high liquidity and easy credit conditions.
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Background reading
Mr Chandler answers your questions on the forces behind the world’s currencies. Is the dollar destined to slide further as European growth outpaces the US? Why is sterling so strong? When and why should China float its currency, and what is the right level? Are speculative ”carry trades” artifically weakening the yen as hedge funds borrow in Japan to finance risky investments elsewhere, or are other fa0ctors also at work? Why are currency moves so notoriously difficult to predict?
Mr Chandler is a widely-recognised commentator on the foreign exchange market. He has been analysing, writing and talking about currencies for more than 20 years. His current research projects include global imbalances, Islamic finance, and the relationship between savings, investment and growth. Mr Chandler joined BBH in October 2005 after stints as chief currency strategist for HSBC Bank USA and Mellon Bank, and since the early 1990s has taught classes on International Political Economy at New York University, where he is an associate professor.

Just got this in an email.

Got me kind of worried!
When mainstream financial people are asked about the Iraqi dinar, it is not good news.