Tuesday, January 22, 2008

I Wanna Know

OK... head over to the comments section: It's groupthink time.

If there is a world wide recession/depression, what do you think will happen to the value of the US Dollar, especially vis-a-vis the Thai Baht?

My personal opinion is that the bigger, better-known currencies, linked to bigger, more-influential economies will fare better in a worldwide economic slowdown. Smaller currencies (like the Baht), linked to smaller economies will simply have to hang on and pray.

11 comments:

Gunny said...

A worldwide recession will not have much of a relative effect, so I would expect not much will change. Plus, the Thai central bank is closely managing the US$/THB exchange rate for the last year or so (and have lost billions of baht in the process BTW).

The single most important event that will effect the exchange rate is tied to the King's health and the political turmoil that will result when he passes.

I will understand if you delete this comment, but the reality is that, regarding this issue, it is the pink elephant in the room that no one is talking about.

MikeF said...

I am afraid that the US$ is not the safe haven currency it once was. The move by the U.S. Federal Reserve to cut the discount rate by 75 basis points this morning which, in turn, triggered many economic pundits to speculate even further cuts over the short term is probably going to weaken support for the US$ vis-a-vis the other competing currencies even if the other central banks cut their own rates. There are deep-rooted, fundamental problems with the U.S. macro economy. I would operate on the assumption of continued volatility in the global financial markets which will, in turn, lead to continued volatility in the currency markets.

That said, the prior poster's reference to the threat of local political and economic turmoil is a valid one, IMHO.

Kind regards, MjF

Anonymous said...

I agree with gunny. Except that any currency such as baht tied to dollar will continue to suffer until we have a turn around. The pink elephant is going to affect Thailand greatly but who knows how long that will be. The PI peso is safe as far as I can tell.

from Jakal

Anonymous said...

i think it goes something like this:

Americans dont have any faith in the dollar, and have been investing oversea's in emerging markets for higher returns and to take advantage the weakening dollar.

During an world wide economic slowdown emerging market economies are more leveraged to growth so they will be hurt more. Emerging market assets are sold and money comes home thus strengthening the dollar.

Jil In Pattaya said...

Gunny, I disagree with your comment for the simple fact that you stated as well: No currency can be propped up indefinitely by it's government. It's too expensive. The Chinese have spent close to $1 TRILLION buying American debt, and eventually even they are going to have to give up. The Baht is a currence which exists amongst hundreds of other currencies, not just the dollar, and it is linked far more to the Thai economy than the dollar.

Mike F, I agree with what you said, but the "volatility" you describe doesn't tell me which way you think the dollar will go. I assume you think it will go down.

Jakal, the baht isn't tied to the dollar (like the Chinese Yuan is), and is hardly "suffering"... quite the opposite in fact.

Anon 5:34, I think basically you agree with my opinion: That in a global economic "emergency", any stability is naturally found in the biggest economies and the most popular currencies. It is hardly the time to go out and purchase stock in Bolivian telecom companies or Indonesian textiles.

M said...

RE: $$$ = baht rates.

Everything is cyclical...even buying gold...which is how I found your blog in the first place (your "5 baht gold chain" entry).

I say that life is for living regardless of the short term financial implications.

People who worry about this stuff too much, (like my friends in the states in the real estate and home construction biz), are just not having fun these days.

"Party in debt" is, and generally always has been, the American way...why worry too much now?

jk said...

Jil:
No currency can be propped up indefinitely by it's government. It's too expensive


eh? why would Thailand want a stronger baht


and why are you referencing China's buying of T bills?
China buys T bills with USD's. It has nothing to do with them wanting a weaker or stronger currency

Jil In Pattaya said...

Thailand is selling off their baht and buying other currencies to keep the supply of baht on the world market high. This keeps downward pressure from pushing the value of the baht down against other currencies.

China is buying T-bills for the same but opposite reason: To keep high demand on T-bills is to keep the value of the dollar up. Since the Chinese have tied the value of the Yuan to the dollar, it is the same as keeping the value of the Yuan strong.

So, as far as "wanting a weaker or stronger currency", what do you think would happen to the value of the dollar if China suddenly dumped $1 trillion worth of T-bills on the market?

It's all supply and demand: Keep the supply limited to keep something valuable; put a lot of something on the market to push the value down.

Jil In Pattaya said...

Also, I think that is why the dollar cannot "collapse" as a currency: Far too much of the world economy is currently in dollars.

On the small scale, it is perfectly possible to make your supply of dollars change magically into Euros, but when you are dealing with billions of dollars, cash supply doesn't work like that: You can't just "change" dollars... they have to be purchased by somebody like stock.

More importantly, if holdings are valued in dollars, then you really have a hard time changing them to a different currency, because that means that the system in which those holdings operate has to be changed as well (accounting, trade, market, legal, contractual, futures, stocks, bonds, debt)... and that is a slow process.

The dollar may indeed be on the way out as the "world's currency", but it will be a slow process that will take many, many years. The current economic picture will change many times over before that happens.

jk said...

Jil In Pattaya said...
"Thailand is selling off their baht and buying other currencies to keep the supply of baht on the world market high. This keeps downward pressure from pushing the value of the baht down against other currencies."


But that would weaken the Thai baht not strengthen it





"China is buying T-bills for the same but opposite reason: To keep high demand on T-bills is to keep the value of the dollar up. Since the Chinese have tied the value of the Yuan to the dollar, it is the same as keeping the value of the Yuan strong. "

That doesnt have a fundamental effect on the dollar since China sells goods to the US and receieves dollars. its just recycling. As you say its not in anyones interests to break the cycle in the way you say

Jil In Pattaya said...

"But that would weaken the Thai baht not strengthen it."

Exactly. When the baht goes from 40 to the dollar to 30 to the dollar, that is a strengthening, and this is bad for Thailand: Say you are sell shrimp to America in Thailand. Before, you sold 100 kg of shrimp to America for 40,000 baht ($1,000). Your options now are to charge America 30,000 baht and lose 10,000 baht, or to charge America 40,000 baht (now $1,333). The first option means you lose a lot of money, the second option means you probably sell less shrimp. Weakening the Thai Baht in this case is a good thing. The Thai government is increasing the supply of Thai Baht on the international monetary exchange in order to accomplish this.

"That doesnt have a fundamental effect on the dollar since China sells goods to the US and receieves dollars. its just recycling."

Not at all, because there are more currencies than Yuan and Dollars in the world. China is keeping the worldwide demand for US Debt high (i.e. keeping the supply of T bills low) by taking purchasing that debt. The Chinese government is gambling that the dollar weakness is a temporary situation which will improve in the long-run. The artifical demand they are creating for US Debt most definitely props up the value of the dollar by propping up the value of US debt on the international market, which inherenlty props up the value of the $1 Trillion worth of T Bills the Chinese have already purchased.

"As you say its not in anyones interests to break the cycle in the way you say"

Absolutely. The Chinese government's is only the first $1 trillion worth of investments valued in dollars that is looking to go down the tubes. Every financial institution, government, and international corporation... basically, the world's financial market... is in the same boat.