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I found this article which I think is fantastic in the latest issue of

Forbes (which I think is a great magazine that everyone should read.)

Anyway, it sums up what I think a lot of us feel about the US dollar and

paints a less than rosey picture for it's future.  For the more paranoid

people out there, consider who would step in to help if the US dollar 

collapsed ? And who would benefit from radically lower wages/costs in the

US ?



Enjoy !!



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Dollar Crash Ahead ?

Forbes page 184, March 13th, 1995 



"The dollar may look cheap, but it is going to get cheaper yet

against the mark and the yen."



Pain Before Gain

by Andrew J. Krieger



   IN MY LAST COLUMN (Dec 4, 1994) I forecast a short-term dollar

decline before a more sustained rally.  The dollar broke lower, from 

1.58 Deutsche Marks to the dollar at the end of 1994, to the current 1.52.

But I am revising my overall forecast.  I don't think the sustained 

rally is near.  In fact, we are likely to get a real collapse in the 

dollar first.



   Only after this dramatic dollar washout to new all-time lows against the

Japanese Yes, Swiss Franc, and Deutsche mark will the U.S. dollar be 

ready for the rally that so many people have lost so much money anticipating

over the last four years.



   I am extremely bearish on the dollar for several reasons.  One is the

global overhang of greenbacks that is the inevitable consequence of a nation

living off loans from foreigners.

  

   Another is the steady reallocation of currency reserve portfolios among

foreign central banks.  They are beginning to substitute marks and yen for

dollars.  The dollar is now over represented, accounting for 65% of overseas

currency reserves even though the U.S. economy accounts for only 22% of

global production.  As central banks adjust their holdings, they will be

dumping dollars and buying yen and marks.



   There's another factor weighing on the dollar: U.S. stocks and bonds

are becoming less attractive to investors-whether domestic investors or

foreign ones.  As holders dump dollar assets to buy Japanese, German, 

French, and British assets, the dollar will suffer.



   The dollar's troubles are deep-seated.  Americans simply spend too much

and save to little and borrow abroad to fill the gap.  Our savings are far

short of what we consume and put into capital investment in factories, 

bridges, and so on.  For a long while we have been able to get away with

this imbalance by raising capital broad-giving foreigners IOUs, Treasury

paper and real estate.  The foreigners have now accumulated net dollar

topping $1 trillion.



   Here's something else to think about.  Many hedge found and asset 

managers are remaining doggedly bullish on the dollar and holding on to 

pro-dollar positions through both option and spot strategies.  But their

hands are weakened by 1994's dismal performance.  They cannot sustain much

further pain in their positions, and these positions would likely be 

liquidated in even a modest dollar selloff, further fueling the decline.



   If you want further proof of the inherent sickness in the dollar, look

at the seven rate hikes by the Fed over the past year.  In normal times, a

7% on year Treasury yield with U.S. inflation under 3% would attract 

massive dollar buying.  But all that the Fed has accomplished with its

tightening is to propel the dollar down to its lowest level in two years.



   Under the circumstances, only a large, sustained downward move will

cleanse the market of its excessive dollar holdings and bullishness.  What

catalyst could set this process in motion ?  Some unpleasant surprises on

the U.S. inflation front would be a likely candidate.



   Wall Street seems to think that the U.S. economy is headed for a soft

landing-slower growth while inflation remains subdued.  I feel, however,

that such a development is unlikely.  The recent slowing of job growth is

probably only a pause in a strong employment market.  The economy is

already past full employment.  I find the inflation risk in the economy

alarmingly large.



   What happens when a pickup in inflation is finally obvious ?  The Fed,

I speculate, will be at pains to avoid overreacting.  It will stay its 

current course.  Then bondholders will worry hat the Fed is losing ground

in its anti-inflation fight.  They will dump bonds, taking interest rates

much higher and the dollar much lower, further fueling inflationary

pressures.



   We might witness an ugly self-reinforcing cycle of liquidated assets

forcing the liquidation of still further assets.  As foreign holders sold

off real estate, Treasury notes and other U.S. securities, they would

pile up dollars.  These dollars would then be dumped at distress prices 

into the currency markets.



   Even the gravity-defying stock market would turn down and begin a

substantial selloff.  Eventually, Alan Greenspan would be forced from his

gradualist approach and would raise rates sharply - and I mean sharply.



   Then and only then would the greenback be poised for a long, powerful

rally, the one everyone's been waiting for.  But first the pain, only then

the gain. 

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