By Shigeki Nozawa
Oct. 15 (Bloomberg) — The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.
“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”
The dollar last week dropped to the lowest in almost a year against the yen as record U.S. government borrowings and interest rates near zero sapped demand for the U.S. currency. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has fallen 15 percent from its peak this year to as low as 75.211 today, the lowest since August 2008.
The gauge is about five points away from its record low in March 2008, and the dollar is 2.5 percent away from a 14-year low against the yen.
“We can no longer stop the big wave of dollar weakness,” said Uno, who correctly predicted the dollar would fall under 100 yen and the Dow Jones Industrial Average would sink below 7,000 after the bankruptcy of Lehman Brothers Holdings Inc. last year. If the U.S. currency breaks through record levels, “there will be no downside limit, and even coordinated intervention won’t work,” he said.
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Hard to argue against, this is exactly what I’ve been saying as well – big changes to the dollar and our system are coming. Changes on that scale usually do not come without upheaval and violence on a large scale – at least that’s what history shows.
The inverse correlation between the dollar going down and equities going up does not, and I will argue will not, continue indefinitely. Below is a three year chart of the Dollar (dashed line) versus the SPX (solid line). You can see that they are inversely correlated now, but at the end of ’07 and into ’08 moved in the same direction – down.
Never moving in a straight line, the Dollar/Yen cross has seen a low in the past twenty years of only 79 and a high of 160.
(click to enlarge)
If I were counting from the 160 high, I would count the 79 low as wave 1, the subsequent bounce as wave 2 and it appears to me that we are still in wave 3 down. Within 3 down, it appears to me that we are making wave 5 of 5 down, but I certainly would not expect a level of 50 to be reached on this move. I would then look for a large wave 4 movement that would be flat and should be followed by a much larger wave 5 down into a low like Sumitomo discusses, so it may take much longer than most think, unless this is a more simple A,B,C. Then again, at the rate of acceleration our government is destroying our currency, it may not be that long at all.
I might add that the demographic situation in Japan is the reverse of that in the U.S.. Following WWII, Japan did not produce a baby boom generation until 20 years after the West did as they had to focus on rebuilding their country. Their baby boom is now entering their peak earning years as ours wanes.