Here's my view:
Yen and USD-funded carry trades will be put on massively once the credit crunch eases. I’m not sure what level the yen and USD exchange rates will settle down at.As the RMB gets acceptance as a reserve currency, Russia, Germany, France, Iran, Venezuela all continue to shift their forex reserves composition to a combination of RMB, JPY, Russian roubles, EUR, etc. The USD will draw strength mainly from its RMB peg.The US still has a perhaps 4-5 years available to deal with an emerging balance of payments crisis. That period, according to Obama’s plan, is to be used to reduce dependence on imported oil, and build a more skilled workforce that can provide better export performance in a weaker dollar world. These two factors can actually be expected to mitigate the effects of an emerging external finance solvency crisis for the US.In between, there are old-style trade protectionists in the guise of current account imbalance theorists; calling for an immediate disruption to the external financing flow to the US. If this goes through, the US will definitely face a sovereign default before the end of this year or the middle of next year.
PS: I posted this as a comment on Brad Setser's blog. As anybody can see, it is quite relevant to the topic of his blog post today;but you should wonder if he will be able to tolerate such a radical difference with his views.
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