Gold will reprice US dollar!
US dollar is overvalued currency at this time and correction is coming!, interest rates in the United States are higher than those in Japan or Europe, which means that the market is in effect predicting gradual dollar decline. But inflation is also a bit higher in the United States; the real interest differential on long-term bonds is probably only about 2 percent vis-a-vis Japan, less vis-a-vis Europe. Thus investors are implicitly expecting only a 2 percent per annum real depreciation of the dollar against the yen over the long term; given the size of the current account imbalance, that just isn't enough. Beep beep!
dollar plunge?
There are, then, good reasons to expect a dollar decline, perhaps even a sharp drop as markets start to pay attention to trade numbers again. Remember that in 1985, when the U.S. current account deficit was about the same share of GDP as it is today, a revision of market perceptions caused a drop from 240 to 140 yen, from 3.3 to 1.8 Deutsche marks.
But there is also a new element, which could amplify dollar decline, and cause a truly dramatic plunge: balance-sheet domino effects. According to people who ought to know, the "carry trade" that did so much to drive exchange rates last fall is back in force: a relatively small group of highly leveraged investors have borrowed in yen (and euros? the gossip is less clear) and invested the proceeds in higher-interest dollar assets. Should the dollar fall sharply, they will suffer losses - which will force them to contract their balance sheets, selling dollars, and driving the currency lower still, in what could be a massive overshoot. By much of a gold as you can this is all coming my friends!
