Decline of Dollar, Beginning of End

Ten days ago I reiterated my view that "The dollar will collapse and US interest rates will have strong upward pressure" (see US Economic Prospects: These are the Good Days. March 10, 2009). And this seems to be happening, faster than I expected.

And within a few days ago, the first sign of these movements took place, with the US starting to buy up long term debt, causing the US dollar to decline for the week by more than 5 percent against a basket of currencies. This has been the largest decline since 1985. And according to Reuters, a fall of 5.2 percent at the close later on Friday would [would] make this week's dollar plunge the biggest since 1973 when the Bretton Woods system of fixed exchange rates was finally abandoned.  This decline may also signal an equally significant currency regime change and shift in long run US economic role and fortunes.

From the US government perspective, this is a good move, assuming they also see the same crisis on the horizon. Essentially, they are shifting borrowing that would be short term (e.g. 90 days) to long term debt. This would make a lot of sense if they thought that short term rates would increase substantially during the term of the long term debt, and not have much prospect of falling again. It is an unprecedented opportunity to profit from intertemporal (between time periods) arbitrage -- an opportunity of which few others can take advantage.

By the way, if you haven't read it already, you should see Wired Magazines excellent article about David X. Li's Gaussian Copula Function, and how its misuse to measure risk in Credit Default Swaps (CDS) has been a key factor contributing to the current credit market crisis. 

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all d