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Sometimes I like to say something nice about the dollar, just because everyone is talking bad about it.
I guess it’s in my nature to react like that. I mean if everyone knows the story, what’s the point in listening? The story everyone knows is probably already reflected in the price. Why not look for another story instead? At least that keeps it interesting!
I have argued for many months, and yes even before it morphed, that sub-prime is a global affair. I think it’s a mistake to attach all collateral damage to U.S. shores. Most know that by now. But though most know that, they continue to believe the U.S. dollar will take all the hits. And they may be right. But it’s more interesting to look at the untold story – which in this case, is the potential tanking of the euro and pound.
Why is this more interesting? Well, besides wanting to pick a fight, it’s because of expectations.
Continental Europe’s hit from the sub-prime fallout may be much less than in the U.S., granted. But because expectations for rate hikes and continued growth momentum (growth decoupling from Uncle Sam) still seem so high, it may be time for a rethink.
This is from The Economist magazine [our emphasis]: ?That risk aversion may find surprising victims. In previous financial wobbles, emerging markets often suffered most. This time rich countries, particularly in continental Europe, where some banks have been caught out by the sub-prime mess, may be more worried. Thanks to fat foreign-exchange reserves and current-account surpluses, many emerging economies are well placed to withstand an exodus of investors.
?In Europe's rich economies, in contrast, sub-prime losses and investor nervousness may force banks to tighten their belts, denting the nascent growth in domestic spending. Germany's Ifo index of business sentiment fell for a third month in August, and consumer confidence has also declined. The European Central Bank, which before the crunch had signaled that it would raise interest rates on September 6th, seems to be waiting to see how the dust settles. This week Jean-Claude Trichet, the ECB's head, stressed that the bank was not ? pre-committed to an increase.
?Even if direct financial contagion is contained, America's sub-prime crisis could spawn psychological contagion, particularly a reassessment of house prices. Although the scale of reckless lending to risky borrowers was bigger in America than anywhere else, house-price inflation has been more extreme elsewhere. Countries such as Britain and Spain are particularly vulnerable to a house-price bust.
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