Us need build a credible plan to reduce deficits. Current projections from the administration show deficits coming down but almost no one believes them. And those forecasets don't see the deficit as a percent of GDP coming down to 3 percent, the sustainable level, in the next decade.
In the budgeting round, if not sooner, the administration needs to spell out very specifically how it will get to 3 percent and lower as soon as possible.
One symbolic way to provide confidence: dedicate the unspent tens of billions from TARP to deficit reduction, not additional stimulus.
The technical alalises Dollar is still trying to establish a base as it plays with going above and below its 8 month resistance ... this is like watching "paint dry" ... slow and boring. The reality is that the Dollar is STILL trying to form a base here for moving up and it won't be ready until that happens, so patience is needed while it tries to do that. Friday 's Relative Strength is sill combating its key 48 resistance level, so there is still more work to be done. The Dollar did hit its long term 74.50 weekly support and held last week, so that should be important to the basing process.
The U.S. Dollar ... Longer Term ...
For perspective, this is the Longer Term Weekly chart of the Dollar. The Dollar did hit its long term 74.50 support last week, and that could enable the Dollar to gain traction for the upside ... we shall see.
The current monetary policy of the US Federal Reserve is to devalue the United States Dollar and to create asset inflation. The Federal Reserve has never to my knowledge publicly announced a policy of dollar devaluation or for that matter as Tony correctly refers to it..."Quantitative Easing". However, just as Roosevelt did in 1934 (when he increased the price of gold from $20.67 per ounce to $35 per ounce in USD), the USD is being consciously devalued right now.
The only difference between now and 1934 is that instead of changing a fixed price relationship between gold and the USD (because we don't have a formal gold standard any more), the Fed has simply printed a whole bunch of new dollars which has the same effect.
It now takes more USD to buy an ounce of gold...or a Ferrari or a barrel of oil or a share in one of the S & P 500 stocks. Alternatively, if you hold Euros or Yen, it now takes less of them to buy US assets.
To pay for the speculative excesses of it owners (the banks) the Fed has recapitalized bank balance sheets by printing new money and using it to buy the inflated mortgage backed assets from them.
The banks are now happily making billions with the cash they were given in the carry trade dealing in Swaps and derivatives and doing anything but what the President thought they should do (lend it to the consumers). Its too risky to lend it for residential or commercial development or small business at the moment.
Now, its Wall Streets turn. The S & P 500 has appreciated almost completely on the back of the dollar devaluation which was created when the Fed printed all that money. The Banks, Wall Street and their inside trader clubs in New York are making billions by doing nothing productive with the money but hold inflating asset classes. They don't have to do a thing but wait for the gas tank to get refuelled by a hopelessly compromised Fed.
In the meantime, the consumer and small businessman is losing business and workers are losing their jobs and misery is everywhere.
Nothing will change at the small end of town until the banks and Wall Street decide its time to start the speculation game again. Meanwhile, the Fed also gets its exit strategy from the 700billion in rancid assets it bought from the banks. All it has to do is wait for the inflating value of real estate assets to catch up to the nominal values of the junk they bought from the banks and then they can sell it back into the market.
Unfortunately, there isn't much that can be done. When you break from the gold standard and print money at an alarming rate, you have currency devaluation and inflation. The devaluation is happening now. Inflation is next.
In another think way It is not that the $US is falling - but that other nation's currencies are appreciating, partially because fund flows to riskier currencies.
Pundits surmise the the $US will no longer be used to price oil nor used by nations as a reserve currency, however:
Oil trades in $US and is unlikely to change - 1) largely because the Saudi riyal is pegged to the $US and 2) the $US is the predominate reserve currency (the $US’s share of "disclosed" global currency reserves is 62.8%, the euro’s share 27.5%).
Of the total foreign exchange reserves (est. IMF) at $7,000,000 million ($7 trillion). e.g. China's first and only non-mainland offering of $878.7 million (Oct 27, 2009) - represents 0.013%, Chinese bonds.
The $US value is based on the historical global importance of the US as a stabilizing nation since WWI - the US has exported prosperity around the globe since 1776 when the U.S. was arguably the only representative democracy - today 137 of 200 nations call themselves a democracy.
Most currencies strengthen against the $US - if the nation's gdp is rising faster than US gdp: e.g. The Yen continues its strength as the 2nd largest economy after the US. In 1990 you could buy 160 Yen for a $US, today 88 Yen - despite, BOJ interest rate has been 0.1% since Dec '08.
All countries converge on the economic success of the US - their GDP/per person rises:
United States (gdp $45,800), Canada (gdp $38,600), Australia (gdp $37,300), United Kingdom (gdp $35,000), Germany (gdp $34,100), Japan (gdp $33,500), France (gdp $32,600), Russia (gdp $14,800), Brazil (gdp $9,500), China (gdp $5,400), India (gdp $2,600).
A non-US country's growth consequently causes their currency to strengthen. High interest rates generally support a strong currency:
- China and India are nations with high gdp in recent years and a strengthening currency (curiously the Chinese have "pegged" their currency during the crisis to the $US at 6.82-6.85, since July 2008), India has complained that the Chinese are exporting unemployment with their devalued currency policy.
- Australia is a nation with a high interest rate in recent years and a strengthening currency.
During "panics", since WWI, money has flowed into the $US in times of crisis.
The EURO is the second most important global currency. It almost doubled its value in recent years: e.g. U.S. Dollar, eur:usd $0.8228 (Oct 26, 2000) to $1.6038 (July 15 '08) a 95% decline.
Many cite the IMF offering of $250 billion of SDRs (Special Drawing Rights) on Aug. 28 and an additional $33 billion of SDRs (Special Drawing Rights) on September 9. However, few understand their composition: comprised of 4 major freely convertible currencies: US dollars: 44%; Euros: 34%; Yen: 11%; and British pound 11%.
A dollar decline may actually be desirable in order to make U.S. products more price-competitive against foreign-made products... In this way maybe we will see more dollar declines Euro and Gold valuetion in 2010.We are uncomfortable with dollar declines, and i think the US do not desire Stop the Dollar's Decline?
Disclosure: No positions