Back to the status quo ante, as Yogi Berra might say.
The U.S. dollar may experience a reprieve in 2007, if only because so many people own it and do not want to see their dollars devalued. As the charts below show, developing countries, while gaining exposure to the strong euro, still prefer the dollar.
And then there’s China. With one trillion dollars in foreign currency reserves (most of them U.S. greenbacks) the Chinese have about a trillion reasons to fear inflation in the dollar. This erodes their purchasing power. But maybe 2007 is setting up quite nicely for the Chinese, after all.
If the dollar rallies, this will lead to falling or at least more stable commodity prices. The Chinese can then carefully go on a global resource shopping spree (as they have for the last three years) trading stronger paper dollars for temporarily weak real assets (oil, gas, minerals, factories, capital.)
At least that’s how we’d play it if were running China’s economy. We’re not. But it makes sense to us. Make sense to you?
(source for both charts, Federal Reserve Bank of Cleveland)