us$ in a 1 way lift .......going down

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    By Addison Wiggin and Tom Dyson

    MARKET REVIEW: ONE-WAY TRAFFIC

    "Dollar moving in one direction only: Down"

    This bold proclamation appeared as a headline on FT.com. For an instant we admired the confidence of the prediction, snickered at its foolishness, and then clicked away, not even bothering to read the article; we already knew what it said.

    It would have informed readers of the dollar's new four-and-a-half-year low against the Japanese yen. The dollar dipped briefly below the 103-yen handle, before closing Friday at 103.07. Same story against the euro, the article would have said. The common currency closed at $1.3024, having also set a new record.

    Greenspan got the blame for Friday's dollar dumping after making some disparaging comments about the trade deficit. "It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said. "But when, through what channels and from level of the dollar? Regrettably, no answer to those questions is convincing."

    A second FT piece - this time we read it - interpreted the Chairman's comments "as a broad hint" that the dollar would take the brunt of any current account adjustment. Investors and traders agreed. Your Baltimore-based junior editor did not...

    On Friday, we started buying dollars in the futures markets, and selling gold.

    We like our trades to be scary. The scarier the better. Friday's trading was no exception...and after we'd finished executing the orders by phone, a small patch of cold sweat could have been seen glistening on the handset.

    And just to make sure we wouldn't sleep at night, we picked the weekend when 20 finance ministers were getting together to discuss international trade. It's the G-20 meeting in Berlin. Long-time readers will remember the Plaza Accord, struck on September 22, 1985, and the dollar carnage that followed...The Economist recalls: "Each country made specific promises on economic policy: the United States pledged to cut the federal DEFICIT, Japan promised a looser MONETARY POLICY and a range of financial-sector reforms, and Germany proposed tax cuts. All countries agreed to intervene in currency markets as necessary to get the dollar down."

    The plan to devalue the dollar was spectacularly successful...by the end of 1987 the dollar had fallen by 54% against both the D-mark and the yen. In fact, the devaluation was so ferocious that, by 1987, bankers were starting to fear an all out collapse and were forced to hatch a new plan altogether, the Louvre Accord, to stabilize the dollar. "The dollar promptly rose," adds the Economist.

    Curiously, the current account balance continued to deteriorate for the entire duration of the dollar's move lower, and only started to move back into the black after the dollar had stabilized. This observation leads us to think that, in the intermediate term, deficits have very little impact on dollar trading, and partially explains our willingness to own the U.S.'s 'deeply flawed' currency.

    Regardless of the short-term swings we like to trade, there can be no doubt about the verity of gold's bull market. On Friday, gold put in another strong performance, closing at $446.90, up $9 on the week, and carving out a new 16-year high.

    Elsewhere in the markets, oil finished the week with strength, gaining over $2 on Friday. A barrel now goes for $48.44.

    Bond yields jumped on Friday, following the Fed-head's comments, but finished the week pretty much where they started. 10-year Treasuries offer 4.20% while, at the long end of the curve, 30-year bonds pay 4.88%.

    The stock indexes were all down last week. The S&P fared worst, taking a 14-point loss, or 1.2%, to land at 1,170. The Dow was down 82, to 10,457, while the Nasdaq shed 15, to close the session at 2,071.

    And if our trades turn out to be rotten, we may have a salvation: Internet poker. Yesterday we qualified - via a satellite game - for a Texas Hold 'Em tournament with a guaranteed winner's prize of at least $250,000.

    The tournament's tomorrow. Let's hope that gnarly dollar position doesn't stop us sleeping...
 
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