There are two conflicting policy discussions going on right now. The near-term fate of the United States dollar will depend upon the upcoming news related to how the discussions are going.
The two policy discussions have to do with the talks between government leaders in Washington, DC, surrounding the "fiscal cliff" and the debate going on within the Federal Reserve System concerning the need for further "quantitative easing" to spur on the growth of the economy.
The presidents of two district Federal Reserve Banks are to speak this week. Chicago Fed President Charles Evans and Dallas Fed President are scheduled to gives talks on Tuesday. It is expected that the speeches will give some indication of the debates going on within the Federal Reserve System about the possibility that further quantitative easing will take place.
The feeling seems to be that if either or both of these men give any indication that the Fed is going to ease further, the value of the U.S. dollar will drop. And, this decline will take place regardless of what the news is about government budget discussions.
The talks on the "fiscal cliff" still have a ways to go and a lot of the news this week will have to do with the "posturing" of the various parties in the discussion to position themselves with the public. No real advances in the talks are expected this week since the players are just returning from the Thanksgiving break.
Taking a horizon that is a little bit longer, it seems to me that there are two "known" unknowns clouding the future. The first is the fate of discussion going on in Europe … about the European budget, the financial settlement pertaining to Greece, the European banking union, and the state of the health of the economy in Europe.
Europeans just can't get their act together and they continue to muddle along. The ultimate "decider" still seems to be Angela Merkel, the German Chancellor, who is remaining firm on her view of how the future European Union should look and is benefiting from one of the strongest economies on the continent. The leaders of Spain, Italy, and now France, seem to be getting by on just enough strength to hold on to their national pride without capitulating to a Europe and a euro based on a relatively stronger Germany.
If Europe can get something done, even a very little, the value of the euro will continue to rise slightly relative to the U.S. dollar over the next several months. Otherwise the value of the euro could drop to the $1.27 range.
The second uncertainty relates to what is going on in the Middle East. There is going to be increasing trouble in the Middle East so that the major question to me seems to be when events are going to accelerate. There is peace in Gaza … for a while. Egypt is unsettled and will remain unsettled, as the political turmoil will not recede quietly now that President Morsi has stirred it up. Iran is still an issue. And, then there is Syria. And, of course, the price of oil becomes an issue once trouble boils up in this area.
My belief is that trouble in the Middle East is going to be one of the biggest issues faced by President Obama over his next four years in office.
Longer term, I still believe that the value of the United States dollar will continue to decline, against other major currencies in the world and against the euro. There is one fundamental reason for this.
The United States government has pursued a policy of credit inflation for more than fifty years. The mentality of the people running the United States government has not changed despite the upheavals of the past five years.
This governmental policy resulted in the floating of the value of the United States dollar in 1971, the decline in the value of the United States dollar by about one-third from the time the dollar was floated until the current time period, and the accelerated monetization of the government's debt by the Federal Reserve over the last four years.
Even with a resolution of the "fiscal cliff" there seems to be no will on the part of President Obama and the federal government to reject the policy of credit inflation that has been followed by the government since the early 1960s. Investors in the currency markets, I believe, understand this, and, consequently, this attitude will be the prevailing longer-term sentiment guiding the market over the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.