Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
U-Turn or Perfect Storm? Globalization at Crossroads - 22nd Oct 19
Stock Market Indexes Struggle and TRAN suggests a possible top - 22nd Oct 19
Fake Numbers Fueling the Wage War on Wealth - 22nd Oct 19
A Look at Peak Debt - 22nd Oct 19
The Coming Great Global Debt Reset - 22nd Oct 19
GamStop Became Mandatory - 22nd Oct 19
Learn to Spot Reliable Trading Setups: ANY Market, Any Market Time Frame - 21st Oct 19
How To Secure A Debt Consolidation Loan Even If You Have A Bad Credit Rating - 21st Oct 19
Kids Teepee Tent Fun from Amazon by Lavievert Review - 15% Discount! - 21st Oct 19
Stock Market Stalls: Caution Ahead - 21st Oct 19
Stock Market Crash Setup? - 21st Oct 19
More Stock Market Congestion (Distribution) - 21st Oct 19
Revisiting “Black Monday Stock Market Crash October 19 1987 - 21st Oct 19
Land Rover Discovery Sports Out of Warranty Top Money Saving Tips - 21st Oct 19
Investing lessons from the 1987 Stock Market Crash From Who Beat it - 20th Oct 19
Trade Wars: Facts And Fallacies - 20th Oct 19
The Gold Stocks Correction and What Lays Ahead - 19th Oct 19
Gold during Global Monetary Ease - 19th Oct 19
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Why a Rising U.S. Dollar Is Horrible News for China

Currencies / US Dollar Jun 07, 2010 - 11:18 AM GMT

By: DailyWealth

Currencies

Best Financial Markets Analysis ArticleTom Dyson writes: Hugh Hendry is the famous British hedge-fund manager who predicted the banking crisis and made 40% in 2008. Every few months, Hendry writes a letter to his investors, called the Eclectica Monthly Letter. It's among the best financial commentary you'll find anywhere on the Internet.


In his most recent commentary, Hendry implies you better watch this chart...

It shows the U.S. dollar index over the last 20 years. The U.S. dollar index measures the dollar's value against a basket of international currencies. First, notice the decade-long bear market ending in 2008. The dollar lost 41% of its value against foreign currencies in this time. Now, look at the recent price action. The dollar tested its low in 2009. Now, it's rising...


Here's the thing that makes this chart so important...

Hendry says if the dollar continues rising, you're eventually going to see a depression in China and possibly the rest of Asia. Commodities will also collapse... especially the commodities China buys in big volume, like cement, steel, aluminum, copper, and iron ore.

It's because of exchange rates. You see, China has pegged its currency to the dollar. When the dollar rises, the Chinese renminbi also rises, relative to all the other currencies in the world except the dollar.

When a country has a high currency exchange rate, its citizens have high purchasing power in the rest of the world. They have a large choice of cheap foreign investments and they feel rich when they travel. Working class Brits buying beachfront condos in Spain and Japanese investors buying Pebble Beach golf course property are good examples.

You'd think a country would be happy to have a strong exchange rate, so why is a rising dollar so bad for China?

China used its pegged exchange rate to destroy the trading competition and grow its economy at 9% a year for the last 15 years. Hong Kong, Korea, Singapore, and Taiwan only managed 7%-8% growth over the same period.

A 1% difference may not sound like much, but China basically used this edge to overtake Germany as the world's largest exporter in 2009 and build the largest lowest-cost manufacturing "sector" the world has ever seen.

In other words, China fell for the classic trap. It built its future prosperity on the idea the dollar would always be cheap against other foreign currencies.

Already, the Chinese renminbi has risen 16% against the euro over the last 120 days... This is the fastest, most violent move in the history of euro-renminbi markets. The Chinese renminbi has also risen 13% against the British pound, 13% against the Aussie dollar, and 5% against the Japanese yen.

Europe is China's largest trading partner, and Chinese goods have just gotten 16% more expensive for Europeans.

If you're a Chinese businessman and you're using a 2% profit margin to beat the competition and sell your goods to France, it only takes a 2% currency appreciation to put you out of business. As China's vice commerce minister put it recently, "Water doesn't boil if it's heated to 99 degrees Celsius. But it will boil if it's heated by one more degree."

In sum, if the dollar index breaks out to new highs, half the factories in China – and in all of Asia – are in danger of going out of business.

I'll be watching the price level of 89 in the chart above. If the dollar index breaks through 89, it'll be trading at a new six-year high. In my mind, that pretty much seals China's fate. It's at about 87 right now.

If you'd like to bet against Chinese stocks, the easiest way to short China is to simply buy the inverse China fund FXP. It rises 2% for every 1% the FTSE/Xinhua China 25 Index falls.

But the safest way to bet on chaos in Asia and a massive dollar rally is to hold cash in U.S. dollars. You'll get rich as the purchasing power of your cash increases.

Good investing,

Tom

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2010 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

ken
07 Jun 10, 19:48
china prices

But even if the Chinese were to raise prices by 10, 20, 30%.. wouldn't it'd still be cheaper than what you can produce goods for in a country like Germany?

Plus Germany imports all its raw materials from abroad, so a weak euro means they will be paying much higher input costs. So unless the Germans are willing to accept wages of $200 a month, I don't see how it'd be competitive.

Recent example is Foxconn.. even after increasing their workers wages by 100% they'd still be the cheapest manufacturer. It just means companies like Apple get squeezed with their margins because I don't think they'll be able to pass on higher prices in this environment.


Linda Wretch
08 Jun 10, 18:08
China is still THE king

No matter what fate the US Dollar faces in the short run, we all know the Dollar is doomed, and that TPTB in London want to break all currencies to introduce a ONE WORLD CURRENCY which will be electronic.

The US Dollar is dead.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules