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On the Swiss move

Bruce Krasting's picture




 

I have repeatedly said in these pages that for currency intervention to be successful it has to be done in conjunction with other big central banks. The Go it Alone policy has not worked over the past 20 years. I have no reason to expect that it will work this time either.

I think the most important press announcement this AM is not from the SNB; it is from the ECB. There is little doubt from this that the SNB is in this all alone:

The Governing Council of the European Central Bank has been informed by the Swiss National Bank about its decision to “no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20.”

 

The Governing Council takes note of this decision, which has been taken by the Swiss National Bank under its own responsibility.

 

I think that the SNB has just committed suicide. They did the one thing they should never have done. Draw a line in the sand.

Events far outside of the control of the SNB will determine the consequences of the policy to put a floor under the CHF. While I don’t doubt their short-term resolve to defend the 1.20 level for the EURCHF I am already questioning how long this can continue. Some thoughts on where this may go.

-Stay away from the CHF. There is only one trade to make as of this morning. That would be long the EURCHF. To me that is like shorting gold. Don’t do it, is my advice.

-This has been tried before by the SNB way back in the late 70’s. As a currency matter the policy was a success. The Franc stabilized against the weak German Mark. But three years later the Swiss were suffering a massive hangover. Inflation went from a negligible number to over 7%. There can be no doubt but that the same results will happen again. It’s just a matter of time.

-Stay away from Swiss stocks for the time being. Yes, a cheaper Franc is good for translated earnings. So if you believe that multiples are the only driver of stock prices you might conclude that the move by the SNB makes the SMI (stock index) a buy. Think again. A government that falls back on currency controls as the only measure of policy options left, is a place that you don’t want to put your money. The big jump in Swiss stocks this AM is a logical knee jerk response. But the SNB move is also the kiss of death for the equity markets in Switzerland.

-Europe is falling apart. That reality has not changed as a result of the SNB action. Over the next few weeks we will get more bad news from the EU. In the past the ‘go to’ response has been to buy the Yen and CHF as a safe haven knee jerk reaction. Now that trade is dead (both of them in my opinion). So where will the hot money go the next time the headlines scare capital? There is only one choice left now. That would be gold.

-I believe that the amount of intervention required to drive the EURCHF from 1.14 to 1.20 this AM was quite small. The market immediately re-priced the currency to the level the SNB said it was prepared to defend. But that is not going to be the result at some time in the near future. At some point the SNB will be tested. I have no doubt but that they will step up and intervene like mad the next time the CHF is in demand. But at what cost? How many Euros will they be forced to absorb? E100b? E300b? Could it go as high as E1 trillion? There is no number that can’t be achieved. The question of, “How much can they do?” has not been asked or answered as yet. The market is going to both ask and answer that question. I think the time frame for this is before the end of this year.

-Do the Swiss have the will to take this fight to the bitter end? There is nothing in history that says that they can or will. What if this begins to backfire sometime this fall? Does the SNB just stand there and print Francs? That is what they have said they will do. I wonder what they will be thinking when the money supply first doubles, then triples then just goes vertical. Are they really so stupid to think that the floor on the Franc has no risk attached to it?

-In 2010 the SNB reported a loss of CHF 21b as a result of their failed interventions against the Euro that left them holding the bag. There was political hell to pay for these losses. The annual gains of the SNB are paid back to the Cantons. There will be no gains (only losses) as a result of the new policy. The Swiss exporters, farmers, tourist industry may hail the move today, but just wait till the policy fails. Before this is over the SNB will hold an extra 500b Euros. The losses could easily exceed E50b. This will sink the SNB forever.

-What will the SNB do with all the Euros they have promised to buy? That’s easy to answer. Only German and French debt will be allowed. This will just result in a widening of credit spreads between the North and the South. As this happens more capital will seek a safe haven. What the Swiss have done will add to the instability within the EU. As a result, the ECB will hate the SNB.

-To some extent the strong CHF was a dollar phenomenon. The CHF got stronger and stronger against the Euro. Through the markets this acted as a support for the Euro versus the dollar. What might it mean now that this relief valve has been broken? One possible response is that the dollar gets stronger in a significant way. That has not been the reaction so far this morning, but I consider this to be a reasonable outcome. Just a question for those who are looking at this from a global perspective:

What is the number one worst thing that could happen to the US economy over the next six months?



I would put a “too strong” dollar at the top of my list. Should the result of the SNB action be a 10-15% up move in the dollar versus Euro it will be the kiss of death for US GDP. I think there is a very good case for this to occur. Bernanke must be very upset this AM. What the Swiss have done runs very counter to his plan to “export” US deflation. The Swiss are now going to be the exporters of deflation. The bulk of this will stay in the EU, but some of it surely will come to our shores. If your odds for a USA double dip were 50-50 on Friday, they just went to 70-30.

-How much intervention can the world absorb? Japan is doing it big time in both the currency and debt markets. China is manipulating its FX and interest rates. The USA is manipulating interest rates in an unprecedented way. Brazil, Russia, Korea are all doing the same. It won’t work folks. It will fail. The Central Banks are not omnipotent. The markets are.

-I suppose there is a soft landing scenario to the steps taken today by the SNB. The liquidity problems in the credit markets of Europe could somehow magically stabilize. It’s possible that the debt woes of the PIIGS could also disappear from the market’s radar. It’s conceivable that US growth could perk up and a crisis is avoided.

I don’t see any of those things happening any time soon. I say the SNB move will fail at some point. If/when that happens it will be an important point in history. If we see the headline, “Swiss cave to market – Franc soars” that will be the day that marks the end game of “extend and pretend” policies and market manipulation. That will be the day that the Great Depression of the new millennium begins. What we went through in 2008 will be a walk in the park compared to that turning point.

-I wrote about the prospects of a CHF Peg a few times in the past month or two. I think the steps taken today represent a huge gamble by the SNB. I said of the prospects for this to happen:

The Swiss like to “Double Down”

The SNB has, in fact, doubled down as of this morning. This is the biggest financial bet in the country's long history. They are “All In” on this bet. Not only are they betting Switzerland’s economic future, they have also placed a bet for the other 7 billion people living on the planet. I would give a “zero’ possibility for this to work. Get your seat belts on. Volatility is about to take another monstrous leap.
.

 

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Wed, 09/14/2011 - 03:09 | 1666875 chinawholesaler
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Tue, 09/06/2011 - 17:49 | 1639678 mr_T
mr_T's picture

Moved all my savings to PM. Just say NO to fiatz... vote none of the above... I sleep well.

Buy some gold... maybe the swiss can sell you a tooth or two.

Can't wait to buy some cheap chocolate, watches, and cheese.

 

Tue, 09/06/2011 - 17:45 | 1639668 falak pema
falak pema's picture

 

-----How much intervention can the world absorb? Japan is doing it big time in both the currency and debt markets. China is manipulating its FX and interest rates. The USA is manipulating interest rates in an unprecedented way. Brazil, Russia, Korea are all doing the same. It won’t work folks. It will fail. The Central Banks are not omnipotent. The markets are.-----

This sums up the whole debate that Merkel must face: Either the EU central banks take on the market or they capitulate and its back to the EU drawing board...Merkel's historic decision.

 

Tue, 09/06/2011 - 16:49 | 1639494 janus
janus's picture

of course you're right, Mr. Krasting.

but this is all to script.  the union will be pared back to a nine or ten member 'nordic' state plus the gauls.

which side did you think the swiss would be on?

Tue, 09/06/2011 - 16:36 | 1639447 PulauHantu29
PulauHantu29's picture

"Growth recession"...that's what they're calling it. Growth & Bonuses (steak, yachts, McMansions) on Wall Street......recession for the Middle Class.

 

Europe 'Likely to Go Into Recession': Strategist

http://www.cnbc.com/id/44404780

Europe is on the verge of recession and the US is already in a growth recession – an expression used by economists to show that growth is so slow that more jobs are lost than added, a strategist told CNBC Monday.

Tue, 09/06/2011 - 15:04 | 1639138 Steroid
Steroid's picture

Is it possible that the upcoming Karlsruhe decision was leaked to the SNB?

Tue, 09/06/2011 - 14:56 | 1639081 dxj
dxj's picture

"If your odds for a USA double dip were 50-50 on Friday, they just went to 70-30."

Really, Bruce? Based on what? Switzerland is a tiny percentage of the World GDP and less than 4% of the DXY basket.

It's much more likely that the SNB will get hammered if they try to force the peg. They managed to do it in the 70's but the players are a lot bigger today.

Tue, 09/06/2011 - 14:34 | 1639000 ParisianThinker
ParisianThinker's picture

I am still long the CHF, and I am still in the position. 

Yes, I have lost a lot of my capital in this save haven. But what to do?

I just have an account which has 8 currencies in Switzerland. I can only choose the currency and you have to have real cash to make the exchange.

I phoned PostFinance.ch to trade a large amount of ChF's to any of the crosses,and instead of a 5 pip charge, now they demanded a 25 pip charge. 

Gold is down, and to buy gold, I need euros as I am in Europe. I am not thinking clearly as I don't know how to make up this huge loss.

Any ideas? I could really use some help. I don't see anything as a safe haven anymore. 

Tue, 09/06/2011 - 15:01 | 1639121 walküre
walküre's picture

Are you trying to make up the loss in a day, a week, a month?

Tue, 09/06/2011 - 14:56 | 1639098 Temporalist
Temporalist's picture

Check goldmoney.com you can use most major currencies I believe.  That is to buy gold and silver incidentally if you have finally decided the fiat game is a rigged ponzi "gulag casino" as Max Keiser would say.

Tue, 09/06/2011 - 14:26 | 1638969 the grateful un...
the grateful unemployed's picture

have an interest in a swiss co with an ADR for a longtime, the common denominator in all this is China, that's where their products are made. today they are down twice as hard as the rest of the market. their ability to hedge their currency exposure is a vital part of their earnings, and this kind of volatility doesn't help.

i envision a situation where the currency markets become so volatile that the settlement banks cannot do business. a few days of extreme volatility might shut down the global economy. the feds number one job is to maintain market stability. now after aggressive bailout programs they have committed Trillions? of us taxpayer dollars to foreign banks which could evaporate in a moment?

in the end its not up or down, its volatility that will wreck the global economy.

Tue, 09/06/2011 - 15:02 | 1639126 Temporalist
Temporalist's picture

It's called a Currency War and volatility is the "New Normal."

Tue, 09/06/2011 - 14:26 | 1638965 Big Ben
Big Ben's picture

The strength of the CHF was probably due to worries about the Euro. And I suspect that the Swiss were worrying about future developments wrt. Italy and Spain. However, if I were a European looking for protection against a Euro collapse I would tend to gravitate more to PM's rather than the dollar as a safe haven. But maybe that is just me.

What a world we live in when a country with debt around 100% of GDP, plus a huge amount of off-book debt, unemployment of 9%, an aging workforce, and an out-of-control deficit is looked upon as a safe-haven currency.

Tue, 09/06/2011 - 14:13 | 1638911 ThirdCoastSurfer
ThirdCoastSurfer's picture

In a world already awash in currency, desperate for a place to hide, another wide open spigot is unleashed as the world economy is perceived to be collapsing for why else hide your money at a negative return?  

In a world where there are no guarantees, here is a place where the promise is you can borrow at near zero without fear that 1.20 will be breached and you could borrow cheaper. However, Japan has implicitly said that about 80, without much success (a zillion yen or so later) so saying so and doing so are not always compatible. 

The fact is you can now comfortably hide at 1.20 and you can borrow for near free at 1.20, because who will borrow at 1.50 when 1.20 is assured?

Besides, 1.20 is the level of max pain, not of relative strength, so this move accomplishes what? In a world already awash in currency you can now borrow more for free! 

 

Tue, 09/06/2011 - 14:12 | 1638904 AustrianEconomist
AustrianEconomist's picture

The end of the great debt experiment is nearing and everything is pointing towards a big credit crash coming up. The world’s monetary system needs to be backed by gold in order to move forward with a sound financial system that does not allow banks create money out of thin air. Money should not be based on debt, but on sound intrinsic value.

Check out the latest from the Capital Research Institute (CRI): The Debt End Game

www.capitalresearchinstitute.org

Tue, 09/06/2011 - 13:46 | 1638806 Alvaro de Esteban
Alvaro de Esteban's picture

In this global interventionist mess, my only faith, in the medium term, is not Goverments, it is people and I trust much more in american people than in european. So just regarding currencies I will stick to my old green calvinist-masonic chap, the dollar.

I don´t really see great problem with a moderatily stronger dollar in the near future, but my limited english does not allow me to argument it properly.

Tue, 09/06/2011 - 13:39 | 1638783 WFO
WFO's picture

They talked a line in the sand...we'll see. Gold has reassumed its currency role now that no government can be trusted. No counter-party risk is becoming the only option.

Tue, 09/06/2011 - 13:28 | 1638761 bankruptcylawyer
bankruptcylawyer's picture

bruce i love your articles, but maybe i'm missing something here. 

swiss have a relatively balanced import export with u.s. at 20 billion. link at bottom. 

i thought trade is important too. you really think the swiss franc is going to affect the dollar and balance of payments with major trading partners like the e.u. , JUST because credit spreads on german/french debt with pigs are going to widen?

seriously????

the only net affect i see is the swiss losing money to make their political parties of farmers and other exporters happy. the swiss franc is just not important. the only important thing about switzerland is its banking secrecy laws for the ultra wealthy of europe and other countries. and we are going to see more unravelling of these laws soon. ( at least as far as the news is saying the u.s. is getting on top of swiss banks other than ubs as in the past) 

http://www.census.gov/foreign-trade/balance/c4419.html

Tue, 09/06/2011 - 13:14 | 1638726 duckhook
duckhook's picture

Does the much ,much larger manipulation by the FED  fall into that category?

Tue, 09/06/2011 - 13:12 | 1638719 kaiten
kaiten's picture

1.20 is only the beginning. In few months time, it will be moved up to 1.30, or even 1.40. Just as I said few weeks ago. Wait and see.

Tue, 09/06/2011 - 12:50 | 1638662 oldman
oldman's picture

Bruce,

Thanks for this piece; it gives me another way of viewing the move by the SNB.

If it acted alone then I have completely mis-read this event. I cannot imagine any CB making such a brash move by itself, though, and even if you are correct there will be the proverbial 'un-intended consequences' from this.

I am such a non-professional that I wrote last night:

"This is interesting. The Swiss chose to back the Euro rather than the dollar. I like this if it is as it appears to be. The system is much weaker than any of us imagined; all the central banks of the planet have bet the fucking farm that this will work. I don't know if it will work or not---we'll see, but I think that it will not. In any event this may have finished the dollar---the Europeans stuck together---probably with our money---irony is the only true humor--shit, I just love this!"

This article makes me appear to be simply an old fool, but I am grateful for it because it forces me to re-evaluate and arms me with that which I did not know.

Having said this, I respectfully remain hedged in the euro, chf, and gold. I will leave the dollar to others unless an amplification is forthcoming from you that awakens this oldman. When you have the time will you further enlighten the non-professionals at ZH regarding your ananylsis, please. I do not understand how the SNB could have acted alone on this---no, I cannot accept it. Understanding is beyond my capacity unless the Swiss mind has just snapped, which may be the case.

Thanks again for the piece    respectfully   om

 

Tue, 09/06/2011 - 13:26 | 1638752 Bananamerican
Bananamerican's picture

cabins bitches...this ole world's gone swiss cheese

Tue, 09/06/2011 - 12:41 | 1638625 mackusick
mackusick's picture

So what does a holder of cash CHF do? Get rid of them of wait?

 

Tue, 09/06/2011 - 13:07 | 1638707 franzpick
franzpick's picture

Yes, then sit back and watch the Danse Macabre of the currencies begin.

Tue, 09/06/2011 - 12:41 | 1638623 Dick Darlington
Dick Darlington's picture

Thanks for the article BK, keep up the good work!

Tue, 09/06/2011 - 12:39 | 1638607 Spartan
Spartan's picture

What I have not seen is a deep analysis of the amount of CHF mortgages outstanding outside of Switzerland. One Reuters article recently said that 44% of mortgage debt in Hungary is held in CHF. Just taking Hungary alone that creates a constant upward pressure each month on the CHF as local currency is converted to make mortgage payments.

Any good articles exploring the numbers in more depth?

Tue, 09/06/2011 - 12:22 | 1638565 Canucklehead
Canucklehead's picture

The Swiss move makes sense if you feel the Euro will disappear. The European market will sop up those extra francs while they buy time to bring back their national/regional fiat currencies.  The Swiss franc will be greasing the wheels of European commerce.  Ring fencing the franc with backstopped German (et al) Euros is a good risk mitigation strategy.

There will be cultural change.  First and foremost will be a change in the perception of money being a store of wealth.  With the internet and electronic trading, the store of wealth is any "asset" you feel will retain wealth.  It may be gold, other commodities, stocks, some emerging market bonds so long as it can be easily traded.

If the internet goes down, there goes the neighbourhood.  How do you find the "true" market price for anything, gold included?  How do you tell the "real thing" from the counterfeit?  Would communication companies become the new "banks"?  Would communication infrastructure protect one's wealth?

There are too many banks in Europe.  The Swiss want to ensure they have a seat at the table when discussing the "New Europe".

Tue, 09/06/2011 - 14:08 | 1638878 walküre
walküre's picture

If you paid attention over the last decades in all things Eurofication.. what is happening now is nothing but an evolution of the European concept. Of course there are too many banks, too many governments, too many accountants.

Trust me on this. In 10 years, Europe, the EU, the Euro will be much stronger, meaner and leaner than they're appearing at the moment.

The Swiss are NOT an island anymore. They can't afford to literally "play Switzerland" and remain neutral.. what a crock of shit that was during WW2 anyway.

Switzerland might even join the EU, nobody can predict either way.

As far as Europe is concerned however, they're on a path of consilidation and reconciliation.

Here's one ugly thought. The ECB will emerge bigger than the FED. Ouch!

Tue, 09/06/2011 - 14:59 | 1639116 Canucklehead
Canucklehead's picture

The Swiss are printing money, investing it in North Europe bonds et al and capturing a portion of the premium between the euro and the franc.  When Northern Europe kicks out Southern Europe, Switzerland is there with their investments and the market links.

Germany et al get cheap financing from the Swiss.

Tue, 09/06/2011 - 14:55 | 1639091 Bananamerican
Bananamerican's picture

"As far as Europe is concerned however, they're on a path of consilidation and reconciliation"

Bull. The banking ticks may prefer to ride around on a single dog but there is something in Man that needs a place to Defend, also, a single world (which is what you're scenario implies) can ONLY be brought about as a Corporate State which is tantamount to the parthanogenesis of a rotting corpse. Auto FAIL


Tue, 09/06/2011 - 11:55 | 1638461 scratch_and_sniff
scratch_and_sniff's picture

Lets hope you're wrong Bruce, lets hope you're wrong...

Tue, 09/06/2011 - 11:49 | 1638445 Catullus
Catullus's picture

It feels like a very reactionary move contrary to what had made the franc a safe haven currency. But still, if the rise in franc versus the euro over the past years was a slow motion bank run, pegging the rate doesn't change the flow of money in. They've just locked everyone in who took this bet before 3 months ago to a guaranteed good move. It's not as if money will begin rushing back into the euro zone. The conclusion that the SNB will be tested again is spot on. as Europe deteriorates, the SNB will tested at every news event. Their hand is forced.

Tue, 09/06/2011 - 11:43 | 1638426 DeadFred
DeadFred's picture

Gold can't be the only flight to safety, I love the stuff but there isn't enough of it. As slimed as the dollar is I still expect a massive flight to the dollar. It may be short but I think it will be steep. I'm not much of a currency wonk, but is there a way this Swiss move can be used to force a dollar short squeeze? Borrow CHF convert to Euros then buy dollars? If it can be done I expect it will be done, too much money to be made on a squeeze to resist the temptation.

Tue, 09/06/2011 - 11:48 | 1638440 Spirit Of Truth
Spirit Of Truth's picture

The bullishness around gold is so extreme, I'm coining a new term: EBULLION.

Can't last.

Tue, 09/06/2011 - 14:05 | 1638865 Roger Knights
Roger Knights's picture

"... gold is so extreme ..."

But we're in "Extremistan."

Tue, 09/06/2011 - 16:07 | 1639343 Smiddywesson
Smiddywesson's picture

Yes, if there's one take away from The Black Swan, it's that anything is possible in the world of Extremistan.  Gold can go as high as they need it to go to wipe out the debts of the powerful and set up a new system that keeps them powerful.  Extremistan doesn't bow to your petty realities. 

Tue, 09/06/2011 - 13:15 | 1638732 kito
kito's picture

nothing lasts forever. but gold is NOT a trade right now. the comex is completely disconnecteed from the physical market. gold is a store of value. you dont understand the difference i see.....

Tue, 09/06/2011 - 14:19 | 1638939 Lord Koos
Lord Koos's picture

Gold is not a trade, it's a stack.

Tue, 09/06/2011 - 11:41 | 1638425 Mediocritas
Mediocritas's picture

Haven't touched the CHF since first rumours of a peg went up. Don't intend to start again now.

Tue, 09/06/2011 - 11:37 | 1638414 gerryscat
gerryscat's picture

If they Swiss print money and exchange that money for Euro's, they should not then buy up debt they should buy hard assets around Europe, such as green energy providers.

Tue, 09/06/2011 - 11:21 | 1638363 ConfederateH
ConfederateH's picture

Bruce, you didn't discuss how this relates to the push for a "gold franc". Could it be that plans are moving ahead on this, and that this similar to Roosevelt's move in '33 to devalue the dollar against gold? If you look at it from the standpoint that Swiss export industry could no longer allow the franc to remain constant in gold price while the entire rest of the world are busy inflating away their currencies in this world currency war, then this makes sense. Especially if it is a stop-gap until the gold franc arrives in the near future.

Tue, 09/06/2011 - 11:15 | 1638350 walküre
walküre's picture

Bruce,

This was a good move. The ceiling is putting a floor under the markets in the coming days as well.

Gold may be at a double top here.

I think it's time to look ahead and start investing into quality. America is turning a corner at this juncture, is my opinion.

Too much negativity lately.

Tue, 09/06/2011 - 16:15 | 1639367 Smiddywesson
Smiddywesson's picture

One of us is holding an empty fifth of gin and has his ear on the desktop, because you see us turning a corner and is see us going over a cliff.

Tue, 09/06/2011 - 14:17 | 1638933 Lord Koos
Lord Koos's picture

Got any extra crack to share?

Tue, 09/06/2011 - 13:54 | 1638825 phyuckyiu
phyuckyiu's picture

Walkure, I PRAY you spent real money backing up your false presumption that Amerika is 'turning a corner', but I know you're just a chicken shit and just spewing shmegma. Turning a corner of course involves a gain of zero jobs?

Tue, 09/06/2011 - 14:31 | 1638989 walküre
walküre's picture

Classy. Schmuck.

Tue, 09/06/2011 - 12:48 | 1638649 Freddie
Freddie's picture

"America is turning the corner" with ethe islamo-marxist Kenyan?  Oh the train rounding the corner where the bridge has collapsed and the train goes off into the river?  That corner?

Tue, 09/06/2011 - 14:34 | 1638996 walküre
walküre's picture

PEAK ARMAGEDDON.

World is turning, whatever O. says or doesn't say. Hoarding cash is boring. Who wants to be the richest guy on the cemetery? Not me.

Tue, 09/06/2011 - 11:14 | 1638346 anyways
anyways's picture

+1

Good work! And EURUSD goes allready in ur predicted direction.

Tue, 09/06/2011 - 11:07 | 1638329 whstlblwr
whstlblwr's picture

I certainly don't understand currency market like BK, but if higher dollar is death for US economy, then just admit it not real recovery.

I don't think man on street would agree with this that lower dollar that buys less food and less gas is good for his economy.

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