A Floating Exchange Rate World

I think we are living in a “floating exchange rate world,” in which we have lost visual control over what we might believe our assets and liabilities are “worth.” Value is hard to measure, and we Americans normally think about how many “dollars” each value might be. It is a yardstick.

I am studying how to trade in the foreign exchange spot market. It is interesting to me as an economist, to play with the numbers. I like to make lines and colored boxes on charts of daily movements in currency pairs. I watch the dollar-value of the gold and silver ounce, and also some curiosity items like bitcoin, oil, junk bonds, and the DXY. Then I look seriously at the currency pairs, and some of them are paired so we say one euro is $1.0624 (11/25) but others are priced inverse, just for convention and trading such as the Chinese 6.421 (11/25) for $1.00 USD. [update: 8/22 EURUSD $1.1320 and USDCHN 6.659]

What is your house worth? How would you find out? Is that a “hard number” or just a guess? What would a Chinese person think about the price of your house, if they wanted to buy real estate in the United States? We can see if you went to Europe everything would seem about 6 percent more expensive, generally.

We live in a floating exchange rate world, but “one dollar” is not like the “inch” on a yardstick, nor a “meter” in the SI. It is like rubber, and we know the dollar is shrinking continuously in value. The Fed says it is trying to diminish the value of dollars at 2% annually. So far their theory seems not to work very well. I believe the strong overseas demand for the USDollar is having a dominant effect; the USD as a unit of accounting, is strong as a safe haven, and because US Treasury bonds are payable in USD.

The great unified “Accounting System of the universe” has chosen the US Treasury bond as its new gold. But never take your eyes off of gold, because you have few other true references. Perhaps also oil, due to its importance and it is priced in USD. Watch OPEC for any discussions of using a different international Unit of Accounting for oil barrels, but so long as the trading in New York is leading the commodity-price methodology, the USD will remain “reserve currency” and the US Treasury bond will be the ultimate “reserve asset.”

What do they say at the end of some 1950s scary “invaders from Mars films? “Watch the skies.”  The danger of another 2007-08 can come again, in this puzzling financial universe of Federal Reserve interest rates near Zero for more than 7 years and quantitative easing, seemingly not to very much effect.

I claim the foreign exchange phenomenon explains much of the picture, but it could change very quickly. Watch the horizon for scary events. What if Donald Trump were sworn in as the 45th President of the United States in 2017?

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