The Depressing Decline of the Dollar
Truly pathetic the dollar acts like this versus the euro, with 3 countries in throes of rescue or default. The real weakness is hidden by the fact the euro is such a heavy weighting in the dollar basket. As long as most Americans live in a nominal versus real world, we’ll just have a lot of people asking why gas prices are going up and pointing at evil oil executives. And yes it is technically true the U.S. cannot “default” on its debts, since its debt are denominated in its own currency. But it sure can stealth default by handing back its creditors little pieces of green paper worth far less than than when they were borrowed.
Below $74 there does not appear to be much support until sub $72… and down and down she goes. Where Bernanke takes her, nobody knows.
- Weakness in the US dollar, which is causing everything to go up—including gas prices, food and stocks—is unlikely to go away soon as a selling frenzy hits the currency market. The greenback is approaching pre-financial crisis lows and threatening to smash through its all-time low when measured against the world’s predominant national currencies.
- A combination of factors accounts for the weakness, with the Federal Reserve’s easy-money policies, huge national debts and deficits and the consequential possibility of a debt downgrade because of the financial mess in Washington leading the way.
- In short, as trader Dennis Gartman noted Thursday, “the rout of the US dollar” is in full effect. “Panic dollar selling is setting in,” Gartman, a hedge fund manager and author of “The Gartman Letter,” wrote in his daily commentary. “This may carry farther than any of us dream of or, worse, have nightmares of.”
- How low can it go? Rick Bensignor, chief market strategist at Dahlman Rose in New York, said the dollar index which measures the greenback against a basket of select other global currencies, has scant technical support “that has any meaning” between its present level and the historical low of 70.70.
- That’s a widely shared view, even as currency pros wonder how the dollar could be falling against the euro considering the near certainty of sovereign debt defaults in smaller European Union nations. Gartman described the dollar as being in “serious jeopardy” because of its status against the euro, which was defended recently as European Central Bank President Jean-Claude Trichet announced a rate hike in the zone.
- No such defense is being offered in the US, where neither Fed Chairman Ben Bernanke nor most of the rest of the central bank’s Open Market Committee seems much in the mood to raise rates despite the anemic dollar. Though the Fed is ostensibly apolitical, there is no pressure as well from the Obama administration to boost the dollar’s value.
- “If things were to somehow go into freefall or there were disorderly markets, or if it is associated with a rise in interest rates, there could be some concerns there,” said Josh Feinman, chief global economist at Deutsche Bank Advisors. “But that’s not happening at all. Rates in the US are still very, very low. At the margin, (a weak dollar) is a slight easing in financial conditions.”
- That, of course, is not the case for consumers buying food and energy. Food prices also are on a steady climb higher. In both cases, a weak dollar is at least somewhat to blame as it drives commodities, which are priced in dollars and therefore cheaper and more attractive to speculators in the global marketplace.
- But the stock market has enjoyed the weak dollar. The S&P 500 and the dollar have had almost a perfectly inverse relationship this year, with the stock index gaining just over 6 percent in 2011 and the dollar losing 6.5 percent.
- With Wall Street shaking off the dangers of a possible downgrade from S&P, the market is likely to prevail against any thought that it’s time to start enacting policies that defend the currency. The only thing on the horizon that appears to be dollar-friendly is the end of the second leg of the Fed’s quantitative easing program—or QE2—in June. (Until the economy weakens, and QE3 begins next winter)
- Even then, the central bank is likely only to stop its $600 Treasury-buying operations. There are no indications that the Fed will be selling back into the marketplace any of the securities it has purchased, so a rise in rates is unlikely until inflation becomes more widespread and indicated through government economic metrics.
- “That’s probably just a warm-up for a QE 3 program later on. All these things are undermining the fundamentals for the dollar,” said Sean Hyman, currency director for World Currency Watch. “It doesn’t help anything that commodities keep going through the roof. There are a few dynamics working in a concerted effort all at once, and that’s killing it.”
Disclosure: No position
This is a guest post written by Trader Mark who runs the blog Fund My Mutual Fund.
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