The U.S. Dollar: No Safe Haven

By Mike Conlon

A lot is made about the safe-haven status of the U.S. dollar and the inverse correlation it has with stocks and commodities. When the economy is seemingly doing well, risk-takers look to sell dollars and buy higher-yielding, riskier currencies to earn interest. This is more commonly known as a “carry trade” and I described it in an article last week.

The carry trade is a very easy way to make money and it was formerly only available to sophisticated investors. Now, you can participate from the privacy of your own home! The basic premise behind the carry trade is that you want to borrow a low-yielding currency and invest in a higher-yielding currency. You make the difference in interest. Sounds better than putting your cash in a bank savings account, doesn’t it?

Do you know what one of the lowest yielding currencies is right now? That’s right, it’s the U.S. dollar!

And this is likely to continue for some time. If the dollar is going to continue to decline, it doesn’t sound very safe at all, does it? Here are a few reasons why the dollar decline will continue and why you should be concerned.

1. The United Nations at their most recent meeting asserts the role of the U.S. dollar should be reduced as the world’s reserve currency. While this is “nothing new”, this time it may be different. If the dollar continues to fall then alternate solutions may be sought.

2. The Chinese are now “alarmed” at U.S. money printing. This may cause them to take alternate forms of action and could lead to them not only not purchasing future US debt, but actually selling out of the dollar. This could trigger a massive sell-off in the dollar as the Chinese are one of the largest holders of U.S. dollars.

3. The U.S. Fed and Bernanke are going to keep interest rates artificially low for as long as it takes for the economy to recover. While analysts can make projections about when this might be, it could be a very long time before we recover. This will lead to inflation, which could put a damper on the recovery if the Fed is forced to raise interest rates. This would send the housing market into further decline so at this point they are extremely reluctant to do so.

Why is this important? Because as the strength of the dollar erodes, so does your purchasing power. This leads to commodity inflation and in general a higher cost of goods. Let’s face it, as consumers in the United States, we rarely buy anything that is made in the U.S.A as there is nothing that is produced here anymore.

So how do you protect yourself from this game of chicken the Fed and the government have put us on?

Learn about the currency markets! Diversify away from the dollar! Because the only way that the dollar is going to “do well” in the near future is if everything else does extremely poorly.

Now that doesn’t sound very safe at all, does it?

Original article

Comments

[s1ckboy:]

What form of US Dollar holdings are you talking about? Electronic dollars in a bank account or T-Bills? I agree electronic dollars are not a safe haven. T-Bills are a different story. The US is still the largest economy in the world. Where else are you going to put your money? Maybe gold, but it still too small of a market.

If the US is not a safe haven then where are you suggesting we diversify to? China?

Sep 09 10:35 PM

[Dave Wrixon:]

The Fed is going to keep interest rates low because if they go up much the Treasury will be insolvent.

Sep 10 12:55 AM

[Moon Kil Woong:]

Actually the US is doing pretty poorly. Unfortunately, the rest of the world is recovering meaning more demand for raw materials and goods we want resulting in inflation that counteracts our otherwise deflationary environment.

I would contend that unless your buying commodities or stocks that make money overseas either because they are foreign stocks or get a good 20% or more sales from overseas you are bearing an inordinate amount of risks in both cash and US Treasuries and time deposits.

Thus American citizens are in a bad delemma. Keep cash and bet the government will control spending or buy equities and bet the economy won't collapse. Pick your poison. Both a crash and rampant government spending may happen in tandem as 2008-2009 has proven.

Sep 10 01:14 AM

[Moon Kil Woong:]

Actually the US is doing pretty poorly. Unfortunately, the rest of the world is recovering meaning more demand for raw materials and goods we want resulting in inflation that counteracts our otherwise deflationary environment.

I would contend that unless your buying commodities or stocks that make money overseas either because they are foreign stocks or get a good 20% or more sales from overseas you are bearing an inordinate amount of risks in both cash and US Treasuries and time deposits.

Thus American citizens are in a bad delemma. Keep cash and bet the government will control spending or buy equities and bet the economy won't collapse. Pick your poison. Both a crash and rampant government spending may happen in tandem as 2008-2009 has proven.

Sep 10 01:15 AM

[Jasper M:]

Historically, cash was always the best choice when, at the time, it seemed worthless.
US "money printing" will be completely overrun by destruction of credit-based money supply as the deflation accelerates. At which point, the Chinese will be damn happy to have those $s, as they will find themselves beset by other concerns.
"The US Fed & Bernanke" do Not control interest rates! Look at a long chart comparing (Fed-set) Fed funds rate to the (market set) T-bill rate: The Fed clearly does not Lead - it Follows.

Sep 10 01:58 AM

[Dave Wrixon:]

If interest rates/yields rise Treasury values drop. How does that help China?

But yes you are correct. The Fed and other central banks like to pretend they are in control of interest rates but in reality they are all slaves to the markets, unless the market can be deceived. This is a game the Fed has been playing for far too long. The game is up.


On Sep 10 01:58 AM Jasper M wrote:

> Historically, cash was always the best choice when, at the time,
> it seemed worthless.
> US "money printing" will be completely overrun by destruction of
> credit-based money supply as the deflation accelerates. At which
> point, the Chinese will be damn happy to have those $s, as they will
> find themselves beset by other concerns.
> "The US Fed & Bernanke" do Not control interest rates! Look at
> a long chart comparing (Fed-set) Fed funds rate to the (market set)
> T-bill rate: The Fed clearly does not Lead - it Follows.

Sep 10 03:30 AM

[Jasper M:]

Dave,
If $US credit supply implodes, Chines are helped by having large amounts of the safest version of that credit. Their remaining dollars will go Way farther (which will be a comfort, as they are otherwise Very poorly prepared for what is coming).
Of course, they hold lots of (soon to be) worthless corporate paper an mortgages, as well, so there'll be some tears, as well.

Sep 14 01:10 AM