Mitul Kotecha

Higher Gold, Weaker Dollar

I think the last two comments are both fair. It is difficult to argue that gold is leading the dollar. The correlation between the two is strong but it does not say anything about causality. If the perception that the dollar is being debased has intensified then gold is a natural beneficiary.

Higher Gold, Weaker Dollar

I think the last two comments are both fair. It is difficult to argue that gold is leading the dollar. The correlation between the two is strong but it does not say anything about causality. If the perception that the dollar is being debased has intensified then gold is a natural beneficiary.

The Time for Diversification Away from the Dollar Is Upon Us

A lot of the issues brought up in the above mentioned UK Independent newspaper article and the many other similar articles predicting the demise of the dollar are structural in nature ie long term diversification away from the USD.

The reality is that diversification has been ongoing for years (just take a look at the IMF Cofer data). The dollar is still the dominant currency in global FX reserves even if its dominance is being gradually eroded.

One thing to consider is that during this structural dollar decline the dollar has managed some fairly sizeable cyclical upswings. At present, low US interest rates and a worsening interest rate differential with other countries (even the Japanese yen has benefited from the interest rate differential) means the downward cyclical pressure on the dollar is going to continue until the market starts to become more aggressive in pricing in US interest rate hikes.

Eventually Fed policy will turn and when markets price this in suddenly the dollar will not look so bad from a cyclical perspective even it still faces a long term structural decline.

Markets Saturated with Good News

To add a bit more detail and add more to my "rambling opinions" here are the better than forecast data referred to in the article. Just looking at US data releases since the start of the month the ISM manufacturing rose to 48.9 in July (46.5), construction spending rose 0.3% (-0.5%) in June, total vehicle sales were 11.3M (10.2M) in July, pending home sales rose 3.6% MoM (0.7%), factory orders rose 0.4% (-0.8%), non farm payrolls fell -247k in July (-325k), the unemployment rate was 9.4% (9.6%) in July, non farm productivity rose 6.4% (5.5%) in Q2, the trade deficit narrowed to $27bn (-28.7bn), Empire manufacturing rose to 12.08 (3.00) in August, Philly Fed rose to 4.2 (-2.0) in August, existing home sales rose 7.2% (2.1%) in July, S&P/Case Shiller home prices dropped -15.44% YoY (-16.40%) om June, CB consumer confidence rose to 54.1 in August (47.9), durable goods orders rose 4.9% (3.0) in July, new home sales surged 9.6% in July (1.6%) and finally US Q2 GDP was not revised lower from -1.0% despite forecasts expecting a revision to -1.5%. (Bloomberg consensus in brackets).

Now I have purposely ignored the worse than forecast data such as the drop in the ISM non manufacturing index in July, the surprise drop in retail sales in July, and fall in the Michigan reading of consumer confidence but even balancing against these data for the most part data releases in the US have beaten consensus forecasts.

I have some sympathy with last couple of comments, however. Maybe "good news" is overstating the data. After all, many of the numbers are still at historically weak levels and we still have little idea about the shape of recovery yet. Nor do we know if the economy and the consumer will stand up once stimulus ends.

I am just writing as I see it and it was notable that the market reaction (I work on a trading floor not Ivory Tower by the way) was surprisingly small to the better than forecast numbers this week (at least from my perspective). Hope this helps a bit.

Which Country Will Drive the Global Economy Out of Its Recession?

There is clear evidence that the Chinese economy is benefitting from strong stimulus measures in the country. China is on track to grow by at least 8% this year but the reality is that this will be insufficient to provide support for a global economic recovery. Even when looking at all the BRIC economies even if they remain relatively resilient to the global downturn it will be insufficient. The global economy is in for a slow and gradual recovery and at best BRIC countries will provide a limited buffer. The reality is that China still relies on the US consumer and the shift from external growth to domestic growth in the country has been limited. The real question for China is whether the pick up in growth will be sustainable once massive government stimulus has been exhausted.

Economic Data Roundup: Is This as Good as It's Going to Get?

If you think this is as good as it gets for the US then take a look at Europe where the recovery is likely to be even slower.

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Backing the Dollar

I agree with your point on creating a "do it yourself" composite currency and that this is what in any case is already taking place.

One solution that China has proposed to reduce the global reliance on the USD and in turn US assets was to make greater use of SDRs but in reality this would be fraught with technical difficulties and would in any case take years to achieve.

Nor will it be quick or easy for China to persuade other countries to make more use of the CNY in the place of the USD. The first problem in doing so is that fact that the CNY is not a convertible currency and therefore foreign holders of CNY would have difficulties in doing much with the currency.

On Jun 04 11:00 AM Living4Dividends wrote:

> Great article - balanced, non-extremist and well-written !
>
> I agree that world, especially BRIC is concerned that inflation will
> erode the dollar’s value in the long run as America amasses record
> debt.
>
> Will BRIC+K (Brazil, Russia, India, China and Korea) replace the
> dollar with a composite currency ? The answer is very doubtful. A
> composite currency has many problems with infrastructure and support.
> Who would issue bonds?
>
> As you mentioned China, et al is an a dollar trap: While China still
> seems committed to the dollar peg, China is diversifying its foreign
> exchange reserves by using it's surplus dollars to purchase real
> assets that are inflation resistant such as commodities and capital
> investments
>
> So, rather than create a composite currency, if BRICK wants to diversify
> their reserves, they are easily able to do so. They can sell the
> Dollar and buy more YEN, Pound Sterling and Euros and a smattering
> of Gold and Commodities and Capital Investments. A sort of "do it
> yourself" composite currency. This is a heck of alot easier than
> creating a new currency. And China is already doing so.