>From Stratfor. Note early comments on David Kelly's death and political instability in UK.
The Dollar Resurfaces Originally Published on July 21, 2003 Summary A combination of factors is leading to a surge in the U.S. dollar, but we do not expect the rise to be as dramatic as its previous fall. Analysis Disparate developments in Britain, Russia, Japan and the United States are lending fresh strength to the recently weak U.S. dollar. The recovery is real, despite the presence of other factors -- true and imagined -- that are slowing the currency's rise. Political Instability in Britain The first and perhaps loudest developments are in Britain. On July 18, British authorities found the body of David Kelly, a weapons expert who had intimate knowledge of British intelligence regarding Iraq's weapons of mass destruction program (or lack thereof). Since his death -- currently ruled a suicide -- the BBC has come forward to identify Kelly as its source for a story that the prime minister's office had directed intelligence officials to "sex up" available information on Iraq's WMD capabilities in order to strengthen the case for military action against Iraq earlier this year. Unsurprisingly, Kelly's death has unleashed a storm of allegations and charges as thick and tenacious as the armies of midges that plague the British summer. Prime Minister Tony Blair's approval ratings were hardly stellar before Kelly disappeared July 17. Now they are downright dismal. The Iraq war was hugely unpopular in Britain, and now Blair faces a general revolt from within his own party. It is too early to make a call on Blair's future -- and the opposition has yet to join the political feeding frenzy -- but the effect on the markets has been stunningly swift. The pound sterling dipped to a three-month low on July 21, and Blair has found himself with the unfortunate problem of being out of the country on a Far Eastern tour until July 24. At least until the beleaguered Blair returns to London, and likely several weeks thereafter, the pound will confront the dark prospect of a systematic hammering in the markets due to political uncertainty. Russian Cock Fight Even more dramatic -- if less noticed on the global stage -- is the developing instability wracking Russian markets. Russian federal prosecutors have slapped oil major Yukos with a bushel of investigations for tax evasion, privatization fraud, and -- as of July 18 -- murder. The murders (three actual and one attempted) under investigation date back to 1998. The cases previously were dropped due to lack of evidence. At stake is nothing less than the primacy of the Kremlin in Russia's political affairs. Stratfor sources within both Yukos and the Russian presidential administration say Russian President Vladimir Putin fears that Yukos chairman Mikhail Khodorkovsky, the country's richest man and arguably most powerful oligarch, is maneuvering to lead the country in a de jure, if not de facto, sense. Putin is working vicariously through federal prosecutors to convince Khodorkovsky to stick to business, and -- should he prove less than receptive -- to cut him down to size. The fight has been coming for quite some time, and it will set the course for Russian political and economic development for the next several years. It also has frightened foreign investors. Stratfor's contacts on Wall Street, who describe the market reaction to Russian developments as a "cautious panic," have noted nervously that the Russians are currently the big sellers in the Russian market, drawing anxious comparisons to 1997 when Thai investors were the first to withdraw from the Thai market in the run-up to the baht collapse that set off the 1997-1998 Asian financial crisis. Since the investigations into Yukos began July 2, the Russian RTS exchange has plunged some 15 percent. If the current imbroglio continues -- and at this point neither Putin nor Khodorkovsky can afford to back down -- then further drops are certain. Investors also should expect this to spill over in the ruble exchange. Not only is the outflow of cash ultimately destined to affect currency markets, but the Russian Central Bank on July 9 altered its foreign exchange policies. Now Russian exporters need to exchange only 25 percent of their hard currency earnings for rubles, down from 50 percent. The change will reduce the "demand" for rubles, which -- combined with continued political wrangling -- should edge the ruble lower in the weeks ahead. By default, the ruble decline should, like the pound's drop, help bolster the U.S. dollar. Japan: A-Printing We Will Go... It is impossible to speak of shifts in the currency markets without touching upon the greatest of currency manipulators: Japan. For the past six months, Japan has been printing yen en masse to mitigate the effects of the dollar's fall on their export sector. Such actions serve to weaken the yen's value against other currencies, making Japanese goods more attractive in foreign markets and keeping Japan's export industries afloat. In May and June alone, Japan printed and/or sold some 3.98 trillion yen ($25.4 billion) for that explicit purpose. In the past, mere shadows of such overt currency manipulation have attracted scorn from central bankers and politicians the world over, but this time around Washington was surprisingly quiet -- despite the size of the currency emission. The primary reason was that the dollar's plunge versus the euro was a quietly orchestrated affair designed to punish Paris and Berlin for their intransigence on the issue of Iraq. It proved damaging enough to hurl the eurozone into recession and sabotage broader European growth prospects for the remainder of 2003. Japan, however, did not suffer nearly as much as Europe. Washington's lack of criticism of Tokyo's currency-printing orgy suggests that Japan received at least tacit permission to counteract the dollar's fall. Recent statements by U.S. Treasury Secretary John W. Snow indicate that this policy -- if anything -- is gaining strength. On July 18, Snow said, "Japan is going through a tough set of things, and as they deal with those things we are not going to be critical of them at all for their actions. They need a strong export sector." Lights don't come much greener than that. Snow's comments indicate that the brief U.S. holiday from the strong-dollar policy is over and the powers that be in Washington feel it is time for the greenback to resume a managed climb. Steady Climb or Skyrocket? This does not mean, however, that the dollar's rise will be as dramatic as its fall. Other factors will exert downward pressure on the dollar to keep the pace of recovery moderate. Most significant is the ballooning federal budget deficit. Once the cost of the U.S. occupation of Iraq is factored in, the United States is expected to run a deficit of $930 billion for 2003 and 2004 combined. That number assumes that the Bush administration's drug benefit package -- $400 billion over 10 years -- is not adopted (which, considering election politics, it almost certainly will be), and that the occupation of Iraq -- which costs $3.9 billion a month -- ends today (which it won't). Such loose fiscal policies would spook anyone who holds a checkbook. The second feature that will slow the dollar's rise is international perception. The press is in a frenzy about the security situation in Iraq, which translates into skittishness among investors about jumping into the U.S. market. The issue is one of perception, and for now at least, the international perception is that the United States is falling into a quagmire. It doesn't particularly matter that the perception is grossly false; the market moves on gut instincts as often as fact -- particularly in the short term. Total U.S. combat deaths since the war "ended" on May 1 have been less than 40 troops. In comparison, Russian forces operating in Chechnya -- who have a tendency to understate casualty numbers -- have lost more men just since July 1. Chechnya has approximately one twenty-fifth the population and land area of Iraq. To date, the Chechen situation has had minimal effects on the Russian economy or the ruble despite a recent spate of suicide attacks. The U.S. occupation certainly is not going according to script, but neither is it in fundamental danger. Should the markets ever wise up to this, the dollar would have yet another reason to accelerate its climb. ................................................................... _______________________________________________ Futurework mailing list [EMAIL PROTECTED] http://scribe.uwaterloo.ca/mailman/listinfo/futurework
