Tuesday, November 20, 2007 0 comments ++[ CLICK TO COMMENT ]++

Paul Krugman: Weak US$ Ain't So Bad

Paul Krugman, who has been bearish the US$ for ages, is of the opinion that it isn't so bad. He makes an entry in his blog about this.

The US economy is going to suffer from housing, but apart from that, I also share some of Paul Krugman's views. I don't see how a weak US$ is bad for USA per se. The weak US$ should reduce the current account deficit, by increasing exports and weakening imports. We have actually seen this for the last year or so, with current account deficit declining.

All throughout the 90's, the Canadian dollar declined quite a bit yet the economy was doing well. I think USA will end up in a similar situation. This is one reason that, although I'm bullish on Japan, I am not too sold on their exporters. The market is bearish on Japan (in fact the Nikkei is the worst performing major index, with negative returns this year) but those that do like Japanese stocks tend to favour the exporters like Toyota, Sony, Nintendo, and so forth. If the Yen carry trade unwinds as I expect, the real story is definitely not going to be the exporters. (I will note, however, that exporters look attractive if you believe in the China-to-da-moon theory--I don't).

Most of what I have said above is about the economy and not the equity market. It is quite possible for the US economy to do ok (after the near-term slowdown) while the stock market does poorly. Depending on how much the US$ declines, foreign investors could be taking massive losses on the currency.

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