Currency – The Real Story In Global Markets For 2009?

Paul – it has been absolutely breathtaking to watch currency movements of late – and I think that trend will continue.

The U.S. dollar plummets to 1.60 to the euro in the spring, and then soars to within 1.25 as U.S. banks collapse left and right this fall. The British pound takes one of the most shocking falls this side of the Argentinean peso and is on the verge a falling to par with the euro … which is practically unimaginable to me, and makes it look like the U.K. should have gotten into that mighty euro while the getting was good.

The mighty euro? Talk about a phenomenon that is hard to believe. The European economy is impotent, as is the ECB’s ability to take strong coordinated action in the face of crisis. And interest rates are getting down to the zero zone seen in the rest of the world, so why the strong euro? Well, in a world of the blind, the one-eyed man is king I guess.

The fundamental factors are so stacked up against the U.S. (and now U.K.) in terms of trade and current accounts deficits in the U.S. and a dire array of factors seemingly bordering on what are effectively fears of a national default in the U.K. So the dam had broken, or is breaking. Really only the deleveraging during the thick of the credit crisis propped up the dollar … and pound sterling’s plummet to me is absolutely stunning – I’ll leave it to you to explain that, Paul.

But the point of all of this is that with their wild volatility, currencies have been HUGE drivers of returns (negative or … less negative) of late, and I suspect this will continue to be the case. If you’re not aware of currency movement in your portfolio, you’ve got a blind spot that could amount to the majority of your percentage returns. When prospects are bleak as now, the only upward movement may be in the “zero sum” part of the market.

Consensus is dollar bearish, Chinese yuan bullish. Talk about a dam waiting to break … if/when the yuan ever floats, look out below for all the rest of the currencies. The Chinese have held down their currency, propping up exports, while being extremely savvy in extending enormous amounts of credit to the U.S. and financing their own boom and coming to OWN the U.S. while the Fed and U.S. financial giants were asleep at the switch.

Interesting times … and currencies are among the most fascinating parts of the market to watch, because they are tied intimately to the flows and the big macro factors in the global economy. What currencies have done and will continue to do are effectively markers in history, and determinants for your portfolio returns. Pay attention.

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