Is Dollar Revulsion for Real?

The U.S. dollar got crushed again on Tuesday. I have been waiting to see if and when it hits parity with the Swiss Franc, and Tuesday’s action brings us that much closer. The dollar is losing ground against the dollar bloc (Kiwi, Aussie and Loonie) as well as against the Franc and Euro.

What gives? Allegedly, a plot by central banks to dump the dollar, according to British daily The Independent.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

Let’s call this dollar revulsion. Now, I am sceptical about the authenticity of all of this revulsion. But it is having an affect on currency markets. While I see the U.S. dollar as a weak currency, I am not convinced that anyone (except maybe Iran or Venezuela) thinks it is in their best interest to provoke a disorderly depreciation. The Chinese, with their $1 trillion in reserves, have a vested interest in preventing a disorderly move away from the U.S. currency.

Nevertheless, people are talking and are taking this very seriously:

This is not new news of course, for such a change from dollar pricing to some other methodology has been discussed, rumoured, tossed about for months, but this time we note that Japan and France are involved in the meetings and that changes the tenor of the rumours entirely. Too, the addition of the Saudis and the Emirates AND Kuwait to the meetings adds further importance and seriousness to the threats…

The article in The Independent becomes quite serious in that The Independent has not been given to such rumours in the past. This is not The Sun, nor the NY Post. -- Dennis Gartman

Is it curtains for the U.S. currency? I maintain a healthy dose of skepticism, but I will say this: if the dollar does decline, Bernanke and the gang will be high-fiving it up and down the corridors of Washington because the dirty little secret is that the U.S. wants currency depreciation. Policy makers in America want inflation. This gets them out of a policy cul-de-sac and certainly helps the U.S. to increase savings without government deficits via an invigorated export sector.

Comments

[waf76:]

I'm in favor of dollar devaluation as well as I get paid in another currency.

Oct 06 02:18 PM

[aussiereader4:]

Devaluation in the dollar and inflation is the only option for the US economy.

Look at your Balance Sheet. In debt and deteriorating.

You are lucky that the debt is written in US dollars, those that lent the money to the US will suffer.

Having a strong dollar is more about 'national pride' than logic.

Oct 06 03:28 PM

[Dana H.:]

"Having a strong dollar is more about 'national pride' than logic."

This is total crap. Inflation (which is what a weak dollar implies for the U.S.) is a destroyer of wealth, savings, and prosperity. It rewards the irrational spendthrift at the expense of the conscientious saver. Only someone who thinks of the stagflation of the 70s as the "good old days" could favor a declining dollar.

Oct 06 03:46 PM

[CautiousInv...:]

Congress, the Fed and Treasury have implicitly colluded for different reasons to drive down the value of the dollar. The choice of debtors, sovereigns and private investors to join them is a right inherent in open and free markets.

After taking firm control of the state and mulcting citizens and corporations to death to satisfy their insatiable spending appetites, congress has embarked upon a manic and frenzied spending spree that has led to massive fiscal imbalances and mountains of future borrowing. Treasury's job is to accommodate this irresponsible spending and borrowing while talking up the dollar and promising meaningful reform after giving the banks $billions to play with.

Meanwhile down the street Bernanke and the boys are running the printing presses 24/7, buying U.S. Treasuries, buying mortgage debt and securities and are engaging in various and all forms of quantitative easing. Treasury helps congress and the Fed helps Treasury.

By all appearances the government is doing just about everything in the text book to further devalue the dollar to assist exports and rekindle inflation through higher import prices.

Oct 06 03:54 PM

[CautiousInv...:]

Typo: debtors should read creditors. Sorry,

Oct 06 04:09 PM

[Sterling Ha...:]

I think the main culprit in the dollar weakness is the artificially low levels of U.S. interest rates that the Fed is maintaining in hopes of stimulating the economy. With all the hedge funds doing various carry trades, there will remain pressure on the dollar until interest rates go back up, and then we will see a correction with a vengeance.

Oct 06 04:13 PM

[chap08:]

Dana, I remember the 70s. Those days weren't so bad. There have been worse - like the 30s. Given the choice between a decade remembered for mass unemployment, homelessness and starvation, or a decade remembered for bad haircuts and disco; I'll take the bad haircuts and disco every time.

In the 30s, they eventually took the route of dollar devaluation and encouraging inflation. It was the right policy mix for the time and it is the right policy mix now. In the 70s on the other hand, Volcker was right to go for a deflationary policy. It all depends on the circumstances. Trying to get a strong dollar now would be making the same mistake as Hoover in the 30s, and would end up with the same results. You can't fight deflation with more deflation.

On Oct 06 03:46 PM Dana H. wrote:

> "Having a strong dollar is more about 'national pride' than logic."
>
>
> This is total crap. Inflation (which is what a weak dollar implies
> for the U.S.) is a destroyer of wealth, savings, and prosperity.
> It rewards the irrational spendthrift at the expense of the conscientious
> saver. Only someone who thinks of the stagflation of the 70s as the
> "good old days" could favor a declining dollar.

Oct 06 05:12 PM

[derryl:]

"I maintain a healthy dose of skepticism, but I will say this: if the dollar does decline, Bernanke and the gang will be high-fiving it up and down the corridors of Washington because the dirty little secret is that the U.S. wants currency depreciation. Policy makers in America want inflation. This gets them out of a policy cul-de-sac and certainly helps the U.S. to increase savings without government deficits via an invigorated export sector."

Yes, this seems to be the best way out of the trap, the only politically possible way out. Some commenters have argued that currency depreciation and the inflation/stagflation it causes (due to stagnant wages and increased import prices) is the worst thing we should want. But this is precisely the discipline that global capital markets under a gold standard used to impose on profligate nations who spent all their gold buying stuff and then had to WORK to produce trade goods for export.

If you lived above your means for awhile, then to rebalance you had to live below your means for awhile as you exported your way back to health with the help of a devalued currency. The US has been importing goods and exporting gold (i.e. US dollars) for decades. A devalued dollar could turn this around and eventually get the US and the world back in a more trade-balanced state.

Oct 06 09:40 PM

[Denis Gould:]

What the many contrarian investors need most of all is a strong consensus to bet against. Well they currently have two crackers. The world is so sure that the dollar is going to fall and bond yields rise that long bonds are probably the best investment you can make just now.

Oct 06 10:55 PM

[carey_jim:]

Can anyone provide the name(s) of anyone or group who has successfully predicted relative currency values, with excellent timing, during the last ten years?

Proof of these successful, well-timed predictions must be provided of course.

Obviously there is always someone or some group who predicted the LAST relative positions of most world currencies for a given period (say six months) but their track record always seems to return to the mean after a few of these stipulated prediction periods, or proves disastrously wrong in the end IF they manage a relatively long string of correct predictions, say for five or six.

The currency market, like human history itself seems, therefore, to be a random walk taken by a large group of people who don't govern their behavior by reason but by other irrational impulses such as greed, pride, fear, ambition and other animal impulses.

I know in advance that there will always be a very small amount of people who DID predict currency markets with success, for a much longer than average periods, because there are a small amount of exceptional people who win the lottery and other games of chance also. But a tiny group of people who have made fortunes in currency markets, and who no longer risk more than a fraction of their winnings, is not a counter example but is, in fact, further proof.

If consistent success in predicting the future relative value of currencies (and I'm not talking about day trading but relatively long periods such as three months) can't be done, doesn't it make all of this talk about a future devaluation of the dollar moot?

Oct 07 01:39 AM

[insideoil:]

The present US government will only want to devalue the US$ AFTER they have eaten everyone elses lunch for them. All the blustering is about sucking in more of other people's money for as long as possible, before they allow it to be blown to hell, preferably when a 3rd party they can blame (it always has to be someone else's fault) takes the action.
I think the European politicians smell the intent, but are smart enough to try and keep their distance and their independence. Eventually this is going to come down a straight out fight for jobs, and a humdinger of a trade war can only be just round the corner. We are still at the pushing and shoving stage, with a few mannerly thrown fists, just hope we do not get on to knives and guns.

Oct 07 01:47 AM

[nobby73:]

Surely the US government has been the most irrational spendthrift of all?


On Oct 06 03:46 PM Dana H. wrote:

> "Having a strong dollar is more about 'national pride' than logic."
>
>
> This is total crap. Inflation (which is what a weak dollar implies
> for the U.S.) is a destroyer of wealth, savings, and prosperity.
> It rewards the irrational spendthrift at the expense of the conscientious
> saver. Only someone who thinks of the stagflation of the 70s as the
> "good old days" could favor a declining dollar.

Oct 07 02:37 AM

[nobby73:]

This is nonsense. Contrarian investing is all about timing, when everyone has already moved one way and the dumb money has just joined the game, that's when you go the other way.

As it stands, Treasuries are near all time highs if you apply a sensible time horizon, so to suggest they are "probably the best investment you can make" is just silly...

On Oct 06 10:55 PM Denis Gould wrote:

> What the many contrarian investors need most of all is a strong consensus
> to bet against. Well they currently have two crackers. The world
> is so sure that the dollar is going to fall and bond yields rise
> that long bonds are probably the best investment you can make just
> now.

Oct 07 02:46 AM

[Tony Daltorio:]

What nonsense!

Maybe some of the "little guys" you see here on SA are short the dollar and bonds....but the money that really counts - the "big boys" on Wall Street are long the dollar and heavily long Treasuries....so the contrary trade is to place bets against Treasuries and the dollar.


On Oct 06 10:55 PM Denis Gould wrote:

> What the many contrarian investors need most of all is a strong consensus
> to bet against. Well they currently have two crackers. The world
> is so sure that the dollar is going to fall and bond yields rise
> that long bonds are probably the best investment you can make just
> now.

Oct 07 06:05 PM