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A new Cold War Era started this week – how will it impact currency markets?
So you ask what does this have to do with currency markets? Well, as one of my finance professors used to say, it depends. When the US is quoted by the global media as demanding Russia to withdraw its troops, Russians (and Putin is the ultimate example of this) has a national pride that would force it to respond: Oh yeah? Make me. What has started this new cold war is not just the Georgian escalation of words. Polish people were hesitant to install US Patriot missiles in its territory. They are hesitant no more. The Polish accord with the US to proceed with the missile installation this week and the Russian response of “this will not go unpunished” are another clear sign that missiles will start to go up all over the place. Currency markets will wearily start to price in how a stand-off of words will probably translate to a stand-off of military forces somewhere in the coming weeks: as the US supports Georgia, as the US supports Poland, as the US supports Georgia and Ukraine in the Black Sea, as Russia supports its Georgian enclaves, as Russia supports its Baltic citizens, as Russian supports its Cuban or Venezuelan buddies or its strategic partner Iran. So we are in a mess of words that could turn to more. Hopefully just conventional conflict, possibly nuclear. Maybe the Rambo boys just need a little action to vent out that testosterone. Of course, we are venturing into uncharted terrain here. The US and Russia or the US and the USSR have never been overtly at war with each other, other than the cold war variety. Once you get the genie out of the box, can it be put back together easily? Hopefully we will never find out. What seems to have changed this week, though, is the fact that Russia has given notice to the world of a much more assertive foreign policy towards its former republics and areas of influence. Robert Froehlich, chief investment strategist of DWS Scudder Investments, recently argued that there were numerous strategic countries (in the Persian Gulf, in former Russian republics, in Asia, in Eastern Europe) that kept a long-dollar policy in their investments because they expected the US to defend them in case of trouble. Froehlich further argued that if the world perceived that the US could no longer defend them, then they would replace the dollar with holdings in the currency of the bulling nation that presented a threat. We think there is a lot of merit to Froehlich’s argument and this is where we answer part of the question of why is this important to currency markets. Here is an investment tip. The industrial complex is back and savvy investors will no doubt soon realize the attractive long term prospect of investing in the companies that build missiles, technology, and the like for the US Pentagon. US defense spending takes priority over everything else, as you are probably aware. But of course, the US has a nasty fiscal deficit in peace time before the baby boomer retirement wave hits shore and before major US infrastructure expenditure are factored in. Oh, and before we factor in the ballooning impact of entitlement programs that Bush has instituted and Obama is likely to pursue. So, on one hand, other countries policies should continue to bet on the US dollar as long as the US is spending heavy on defense. On the other hand, the US taxpayer cannot support the world’s defense bill for long. Something will have to give. Because the US government will probably not institute anytime soon a billing system for the protection of other countries, it is realistic to assume that severe volatility will prevail on currency markets and expectations for the USD will be, shall we say, fluid. So what does Russian-US actions this week have to do with currency actions? Maybe nothing. Maybe everything. Hopefully currency markets continue to ignore the Russian events and saber rattling as nothing important. Our sense is, though, that what Russia says or does is pretty hard to ignore. [B]About Forex Datasource [/B]ForexDatasource.com (forexds.com) is a content-rich website serving the Forex market. The Forex Datasource Dealer Pages offer the most complete evaluation of Forex broker dealers using information from four different sources. The Dealer Pages are essential for any trader, new or experienced, to carry out the necessary initial and ongoing due diligence of Forex dealers. Forex Datasource also offers interactive features that allow traders to prepare for upcoming price volatility and also counts with proprietary tools and weekly reports for swing and position traders. Forex Datasource also licenses its FX Hound widget technology to major Forex websites and Forex brokers. ForexFactory.com readers also have a special privilege. From the following link only available in this report, you may download for free the Premium version of the FX Hound to keep current with the Forex market without having a trading platform open. [url]http://www.forexdatasource.com/widget/ProtraderReg2.aspx[/url]
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