US Dollar movements - Advice required.

[Forest]

Must admit I don't really understand this. Uridashi bonds are actually $US but invested in $NZ, isued by Japanese. Go figure.

Apart from that, as Yellowdog says the US$ is still overvalued given the ginormous American government deficit.

At the risk of over-simplifying, I'll try to explain it in broad terms.

The Uridashi are what traders call a "carry trade". Basically the investors in Japan put down a small deposit and borrow a large amount of money (they borrow the money in Japan because Japanese interest rates are very low). The borrowed money is used to buy fixed interest investments in New Zealand (where until recently, the interest rates on NZ government bonds were very high). The difference between the NZ investment and the cost of borrowing is the return on the investment i.e. the profit on the deal.

When the fixed interest investments in NZ mature, the Japanese investor has to sell them to get the investment capital back (which they need to pay back the bank that lent them the money in the first place).

Foreign currency is actually very simple in that it moves for only reason - Supply and Demand. If the majority of trades involve people wanting to buy NZD then the price goes up, if the majority of trades involve people wanting to sell NZD then the price goes down.

So if a stack of Uridashi bonds mature at the same time, you suddenly have a large number of investors who need to sell their holdings in a short period of time. This causes a spike in the supply of NZD and the price of the NZD falls in response.

[Forest]

Apart from that, as Yellowdog says the US$ is still overvalued given the ginormous American government deficit.

Not really.

The high value of the USD shows that the world believes that the US government can continue to service the cost of the debt it has incurred.

Government debt is different to personal debt. Governments borrow to build infrastructure such as roads, bridges, social services, schools, airports, and sea ports. This infrastructure creates an environment in which private companies can grow and prosper.

The net result is that the economy grows, which causes the tax base to increase, which allows the government to service the debt it incurred.

At least that's the theory. The problem is that governments aren't very good at building infrastructure and a decent proportion of the investment is wasted on failed and misguided projects.

Fortunately for the US, their economy has grown massively in the last one hundred years. So they've been able to cope with poor spending decisions by their government. And consequently the global confidence in the US economy (and by extension the USD) remains high.

Having said all that, in my opinion the USD is likely to fall in value (relative to global currencies) over the next 12-24 months. This is due to the Federal Reserve massively increasing the amount of USD in circulation (which they are doing to ensure that US banks have enough liquidity to continue operating).

[jimevo]

USD = Liquidity... that alone will ensure the continual dominance of USD.

Yes it will NOT be feasible for the Fed to continue printing notes to flood the market, and yes the US must start working on reducing the record level debt...

No investors or speculators are going to bank on stashing Yuan for safety given how "unpredictable" the Chinese regime is...