Why Buy Dollars?

There have been analyst calls that the recession is over/bottomed, that the green shoots are abundant, and all is going to be rosy in the garden very soon. Well, not to rain on anybody else's parade, but there is a bear out there knocking on the equity door. Russia has just dipped into a bear market, and other regions are not too far behind it seems.

The net result is that without equity markets that can hold in the green, or at least easily negate heavy selling days with a subsequent bounce, the currency markets will spin their wheels. The historical move is from stocks to bonds on days that equity fear is rife; but how many more buyers of U.S. Treasury notes there are is going to be questionable if equities do go into another bear cycle.

The Fed is trying to negate the rate at which Treasury notes are increasing their yields (read mortgage, inter-bank, credit card, and overnight, interest rates), at a time that Team Bernanke have a commitment to buy notes printed to save the economy. More notes equate to higher yields, and by default, an increase in the economic interest rate that is set off 10 year Treasury yields. The overnight rate may be at 0.25%, but the real economy is actually dealing in 3.8% (10 year yield) plus premium; +5% interest rates.

If the bear market gets re-set it will be hard to see the same amount of USD appreciation that happened in the last cycle; the reason may be that overseas buyers, and the Federal Reserve, are bloated with dollar bills and notes. That gives us more reason to think that a sideways, channeling period of trade may be at hand, with fair value on stocks, oil, gold, and currency being hard fought each and every session.

It is crystal clear that the dollar is getting bought on volume only the days that a hedge against falling equity markets is required, and also very clear that given half a chance trade desks are liquidating near-term dollar trades whenever equity futures move higher. It may be that no global region is in a much better current economic situation right now, but going forward there are few major currency economies that will carry a Debt-to-Growth ratio that comes anywhere near the U.S. and as such it may well be that global growth comes from outside of the U.S. first.

Regional equity markets are doing their part in the buying of stocks, and European markets are trying to push higher, but it is being negated by the repeatable pattern of U.S. markets easily falling apart. The U.S. will always be a major economic power, but after the 2007-2010 business cycle it will definitely not be the only economic power. Therefore the mighty dollar, the King of currency, will always have the crown; the global markets are too far into the dollar paper mountain debt to ever get out of it, but the luster and shine may be gone once the dirty laundry has been aired in public.

Perception, they say, is reality, and the reality here is that fair value on the dollar index is at 80.00, and very little right now looks capable of changing that, either way.

Comments

[DONE_SONZ]

If the usd is the king,then gold is a god.

2009 Jun 28 10:07 AM

[Dave Wrixon]

"Perception, they say, is reality, and the reality here is that fair value on the dollar index is at 80.00, and very little right now looks capable of changing that, either way."

Those sound like famous last words!

2009 Jun 28 12:33 PM

[Dave Wrixon]

Well as God doesn't exist, I would have to agree with you!


On Jun 28 10:07 AM DONE_SONZ wrote:

> If the usd is the king,then gold is a god.

2009 Jun 28 12:34 PM

[DONE_SONZ]

I wasn't comparing to God with the capital G.For those who believe.

On Jun 28 12:34 PM Dave Wrixon wrote:

> Well as God doesn't exist, I would have to agree with you!

2009 Jun 28 12:48 PM

[ed233]

If the Fed terminates itself as a buyer of its own "I owe you's" then what do you think would happen in the short run?
LOL Looking after your money.

2009 Jun 28 12:51 PM

[Mad Hedge Fund Trader]

Only if you are a masochist. Since we are smack dab in the middle of a six year trading range, I don’t really have a handle on what the buck is going to do short term. Obama’s highly inflationary, reflationary policies will eventually lead to an utter collapse in the dollar. If they are successful, the economy will recover, bringing Americans back to their old low saving, high consumption, high importing ways, adding fuel to the fire. Don’t bet against the 38 year trend. Expect to pay $2.00 for a Euro in the years ahead. Take that European vacation now! see my piece on this at
www.madhedgefundtrader...

2009 Jun 28 03:54 PM

[Jeff Nielson]

Like all currencies, the USD is backed by NOTHING. What separates the U.S. from most other economies is that is it hopelessly insolvent.

This makes the USD effectively worth ZERO.

Those who do not recognize that today will pay the price tomorrow.

2009 Jun 28 07:01 PM

[AJ Clausen]

Every major developed region is nowadays in an economic crisis, but it seems to be that the USA are deeper in a turmoil than the rest. Though the financial industry is certainly ahead, especially compared to Europe, main infrastructure problems are going to weigh on the USD: the nearly dead automobile industry (it certainly will live again no doubt about that), the surplus of service industry and the near total lack of production in the US (might be in the end not that cheap in China), the disastrous social situation, specifically mass education, and two still unfinished wars will make the Greenback cheaper to the other currencies.
I can therefore well imagine seeing 1,60 against the Euro and 0.95 against the AUD.

alexander-clausen.at

2009 Jun 29 01:50 AM

[Dave Wrixon]

I am sorry but this is completely wrong. The currency is backed by the ability and willingness of the US Government to make good on it promises. OK, the end result is much the same that the dollar is fundamentally virtually inherently worthless due to the crass mismanagement of the economy and the incredible debt burdern that is being accumulated at an ever increasing rate, but it is nevertheless money and whilst currency traders still believe in it, however naively, then it still has market value.


On Jun 28 07:01 PM Jeff Nielson wrote:

> Like all currencies, the USD is backed by NOTHING. What separates
> the U.S. from most other economies is that is it hopelessly insolvent.
>
>
> This makes the USD effectively worth ZERO.
>
> Those who do not recognize that today will pay the price tomorrow.

2009 Jun 29 02:57 AM

[Moon Kil Woong]

The dollar is only backed by the ability for the US government to get its citizens to pay. Thus you are a slave to the system whether you want to be or not. In the end, it's your sweat, your blood, and your debt.

People need to realize that simple fact and tell the government to stop wasting our money and running us into the gutter through massive systemic deficits that require foreign capital to fund them. Fiat currency or gold, it matters not if it all is shipped away in crates to some foreign power. In the end we wind up with nothing or worse yet less than zero (we owe interest).

2009 Jun 29 04:18 AM

[Jordan Lindsey]

<If the bear market gets re-set it will be hard to see the same amount of USD appreciation that happened in the last cycle>

As Soros put it, 'it is not because there is a demand for the USD but rather because of the debt based monetary system that causes this.'

2009 Jun 29 09:15 AM

[The LFB]

Agreed Jordan, just this time round there is no rule book to work from, and the debt based system is lacking a major component; accountability.

No M3 numbers, disjointed TIC data, a CPI report that looks as though the Riddler from Batman put it together (oh wait, Mr Alan Greenspan may have worked on M3 and CPI reporting), and now a 'Strong Dollar' policy getting spouted at each opportunity. Hmmmm, something just does not add up, whatever our individual opinions are.

Thanks all, for the feed-back.

2009 Jun 29 12:42 PM

[JeffDB]

On Jun 29 04:18 AM Moon Kil Woong wrote:

> The dollar is only backed by the ability for the US government to
> get its citizens to pay. Thus you are a slave to the system whether
> you want to be or not. In the end, it's your sweat, your blood, and
> your debt.

To an extent it also seems to be backed by others' acceptance of the "full faith and credit" of the U.S. government.

> People need to realize that simple fact and tell the government to
> stop wasting our money and running us into the gutter through massive
> systemic deficits that require foreign capital to fund them. Fiat
> currency or gold, it matters not if it all is shipped away in crates
> to some foreign power.

But it *does* seem to matter from what I can tell. If we ship our fiat currency abroad is quite different than sending "things" with an inherent value. If the U.S. dollar is devalued enough, current holdings by creditors could be cut in half or less. That couldn't be true if they held our gold. I've read that in the Weimar Republic the German fiat currency became so worthless that people were using it to wallpaper their homes. I saw a picture of a woman feeding a wheelbarrow full of money into her furnace to keep warm. I guess it couldn't drop to much less than the paper it's printed on, but it theoretically could drop up to that point.

>In the end we wind up with nothing or worse
> yet less than zero (we owe interest).

But 110% of zero value wouldn't be that onerous. ;) Obviously we need to get our financial house in order, but until then, I vote that we keep sending them fiat currency as long as they'll take it.

2009 Jun 29 01:54 PM