The United States Dollar In 2013

Includes: UDN, UUP
by: John M. Mason

As readers of this blog know, I am not a bull when it comes to the future of the United States dollar.

Here, at the start of 2013, I continue to believe that the value of the United States dollar will be lower at the end of the year than it is now.

Last year at this time, my thoughts on this subject were dominated by the recession looming in Europe. European officials did not have their act together and "kicking the can down the road" seemed to be the only action that they could produce.

In the United States, there was a presidential election going on. Nothing was going to change as far as the economic policies of the government was concerned.

Thus, I believed that although the long-term direction of the U. S. dollar was downward, I felt that in 2012 the basic action would be sideways.

In terms of the U. S. dollar versus the Euro, the movement was, in fact, sideward, with the dollar moving in the range of 1.21 dollars per Euro to 1.34 dollars per Euro. In January of 2012, the dollar trader around 1.29 dollars per Euro and in January 2013 the dollar traded around 1.31 dollars per Euro.

The Federal Reserve's trade weighted dollar index against major currencies also moved sideways during the year 2012. The index reached a low of around 72.0 and a high of just below 76.0 and closed the year short of 74.0.

Thus, in my mind, the U. S. dollar did just about as well as it could in 2012 but not because of what was happening in the United States but because of the turmoil in Europe.

Another indicator of this international situation was the "flight from risk" taking place in international bond markets. Funds "flew" from risk into the "safe havens" of United States Treasury securities and German government bonds. As a consequence, the monies coming into the United States required the purchase of dollars before the bonds could be purchased. This was one of the reasons why long-term interest rates were so low in the United States.

Now, it looks as if money is flowing the opposite way. Long-term Treasury interest rates have moved up over the past month…as have long-term interest rates in Germany.

The apparent cause of this flow of money back into riskier assets is that European officials have apparently moved along the path of banking unification and fiscal unification. They, at least, have raised confidence sufficiently that international investors are willing to support the Euro and support the lower-rated bonds of the peripheral nations in Europe.

That is, there is some feeling that the European Union is moving in the right direction and will continue to do so. This is providing international financial markets some reason for moving into higher yielding securities to garner some more return.

And, what is happening in the United States?

The United States is now the one who is seen as kicking the can down the road. The federal government is just conducting "business as usual."

What does that mean?

In my mind it means that the United States is going to continue along the path that it has followed for the past fifty years or so…the path of credit inflation.

The federal debt stands at a little more than $16 trillion. Given my expectation that the government will continue to conduct "business as usual," I expect that over the next ten years the federal debt will rise by at least $10 trillion, bringing the total debt of the United States to more than $26 trillion.

I don't see any movement of any consequence going on in the United States to change this direction.

Thus, the United States is going to continue on the path of credit inflation. Europe is going to see its recession come to an end in 2013 and European officials are going to move further down the path to banking union and fiscal union.

This is not good for the value of the United States dollar.

Credit inflation in the United States began in the 1960s. By the end of the 1960s it was evident that the existing system of fixed foreign exchange rates established after the end of World War II could not continue. On August 15, 1971, President Richard Nixon took the United States off the old system of fixed exchange rates.

But, the United States continued to inflate credit during the next thirty-five to forty years. And, the value of the dollar was in almost constant decline up until the advent of the Great Recession in 2008 and 2009.

Now, we are on the other side of the Great Recession.

And, we are back to the U. S. government's policy of re-inflating credit.

This, in my mind, can only lead to further deterioration of the value of the United States dollar. If Europe continues to get its act together, the United States finds itself in the position that no other major nation is inflating its credit as much as the United States is. Over time, the value of the dollar can only continue to decline.

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.