I think the dollar will experience broad-based depreciation in the coming months, particularly against the Asian currencies.
Regardless of the decision on the euro, the U.K. is becoming so well integrated into the euro economy that investors are willing to invest in the pound as a proxy. That has made the pound surprisingly resilient.
I strongly doubt that this will be the beginning of wholesale diversification from U.S. dollars.
With the strong labor report, strong retail sales, and the strong inflation report, market expectations of a sustainable U.S. recovery have increased.
Facing the fog of uncertainty, the Fed should see the benefits of pausing on September 20,
People are still looking for an interest-rate cut, but it's not at all clear when that will happen. Expectations are very volatile, but the point is that the currency seems very reluctant to go down either way.
The bottom line is headwinds are mounting against the Asian economies,
This could be the beginning of an interesting game between the ECB and the financial markets. If they believe the ECB has miscalculated they will take on the euro like never before.
There was a view among the Europeans and the Japanese at the G-7 meeting last month that persistent pressure may not be the best approach. That wasn't shared by the U.S.
It's all a very incremental process. They want to rebalance the capital inflows and outflows. Without a balance in flows, you wouldn't want to let the exchange rate find its own place.
They can't run out of U.S. exposure. They have Treasuries, cash, the whole yield curve, corporate bonds that they can invest in. They can even invest in paintings.
(After this week's Fed speakers) the bottom line is we will most likely know what the Fed will do before September 20. My ... hypothesis is the Fed will maintain its tightening path, uninterrupted.
Indonesia is the first to crack, due mainly to its fragile institutional framework and a general lack of credibility. But we should start to consider the scenario where what is happening in Indonesia may not be an isolated event in Asia.
Investors want a piece of the integrated European economy and the pound is proving to be a way in. Weakness in the U.K. economy is being offset by the willingness of investors to invest in the country's businesses and buy bonds.
The U.K. is a small boat with a big hole in it, but it's tied to a big ship, that being Europe. Even though it seems like it should sink, it just won't go down.
The Europeans don't care as much about the yuan because the issue is trade and their deficits with the Chinese are much smaller than the U.S.'s.