The US DOLLAR...and other Economic and Finanical matters...

CanadianLoonie

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It's Over
November 19, 2004

While the US dollar has already declined 35% against the euro in the past four years, the main event has not yet occurred. The euro was just the opening act.

Correcting the US trade deficit requires the dollar to weaken against the currencies of those countries with which the US has the largest trade deficits, meaning the Chinese renminbi and the Japanese yen.

The Bank of Japan sold 14.83 trillion yen in the first two months of this year, and bought roughly 140 billion dollars to keep the dollar from falling below 105 yen. But in March they called it quits. Since March Japan has been noticeably less determined to support the dollar and, guess what, the dollar has declined by 7% against the yen since then.

In September Japan actually reduced its Treasury position by 1.5 billion dollars. It was the fist time in two years that Japan sold more US Treasuries than it bought.

I?ve often been asked how long I thought Japan and China would continue to support the dollar. Well, it seems that we now know the answer: until March 2004. With Japanese support for the dollar waning, it won?t be long before China lets the renminbi float and other South East Asian countries start concerning themselves with issues other than competitive devaluations against the dollar.

For a while now the US has been pressuring China to let its currency float, a move that is widely anticipated to lead to a stronger renminbi against the dollar. This must rank as one of the dumbest things I have seen the US do in recent times.

Calling for a stronger renminbi is, by definition, calling for a weaker US dollar. However, US Treasury Secretary John Snow said in London, just this week, that ?Nobody has ever devalued their way to prosperity.? I guess the US Administration feels that the US is already so prosperous that it could afford to pursue a weaker dollar, even though its official policy is one of a strong dollar. If that sentence confuses you, don?t worry, it seems to confuse John Snow as well.

While the fixed exchange rate between the dollar and the renminbi has allowed Chinese exports to remain very competitive in US markets, it cost the Chinese dearly. China has had to buy in the order of 500 billion dollars? worth of US Treasuries to keep the renminbi pegged to the dollar. This year alone China bought in excess of 100 billion dollars. At the same time, the falling dollar has caused the price of Chinese raw material imports to soar. Just in the last year the cost of oil is up 33%, copper is up 55% and nickel is up 18% -- you get the picture. If China allows the renminbi to float, and it appreciates against the dollar as is widely expected, then the cost of raw materials imports to China will drop significantly and that is most certainly positive for the Chinese economy.

China alone will not be able to support the US dollar. With Japan clearly indicating that it is getting indigestion from an overdose of US Treasuries it would imply that China has to take up the slack if the dollar is to remain at its current exchange rate.

Given that China is under pressure from the US to let its currency float, and appreciate against the dollar, this would be an opportune time for the Dragon to politely grant the US its wish. But if the Chinese let the renminbi float it also implies that they would not have to buy as many US Treasuries going forward.

Japan has reduced its Treasury purchases since March and I wonder if our intrepid leaders in Washington have thought about who will finance the growing US budget deficit. Life has been far too easy for US politicians in the past fifteen years. Just like US consumers, they have become proficient at spending in excess of their means, in the belief that there will always be someone out there to lend them more money.

But the game is over. With the US economy sinking into quicksand the buyers of last resort have been the Asians, and now it seems that they have had enough.

According to The Conference Board Inc., a private economic research group, the outlook for the US economy further weakened in September. This is the fifth straight decline in economic leading indicators. With such a bleak outlook for the US economy it?s going to be tough to replace decreased Chinese and Japanese appetite for US bonds with private purchases.

For most of this year I have been saying that we need to see the US dollar decline in conjunction with rising interest rates before the dollar-gold price will sustain a meaningful rally.

Since the day after George Bush was re-elected as president of the United States interest rates have risen and the dollar has declined. It?s too soon to call it a trend, but my own feeling is that the dollar is heading much lower and the gold price is heading much higher.

The US trade deficit is a virtual guarantee that the dollar will fall and the budget deficit is a guarantee that interest rates will rise. It?s busy happening, and there is no end in sight.

Prepare yourself, buckle up, and hold on.


Paul van Eeden

http://www.kitco.com/weekly/paulvaneeden/nov192004.html
 
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I don't know too much about currency, but it sounds like bad news.
Am I right in thinking that a weaker doller might help US exports though?
 

WheatKing

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india has also been cashing in their US t-bills to allow them to make new roads..

North american economies are in for a rough ride as they are all very much linked with the US dollar (whether renesis wants to believe it or not)

Greenspan knows this.. and is powerless to actually do anything.. debt expansion has been so great.. the amount of money actually owed would be impossible to ever back.

the only thing the US has going for it.. is most of the worlds gold is stored in NY banks.. some countries entire fortunes are there.. this gives them a little leverage.. but not for long.

reducing your debt load would be a smart idea. Many economists are expecting no less than 2 years until a large market correction occurs.
 

WheatKing

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weaker dollar does mean that US good become more competitive..

but the value of the dollar is entirely based on it's confidence.. there is currently more money owing than would be available to pay back.

The economy is entirely based on the expansion of debt. Do a google seach on "fractional reserve".

Ever hear on the news when they talk about "consumer confidence".. ever wonder what they actually MEAN..

consumer confidence means that you and I are willing to accept more debt. We believe that our situation currently allows us to buy more houses, run up credit cards and purchase wicked new EVO8's :) all,with the use of "credit".

in order to keep the debt expansing going, you need to have low interest rates.. but.. the interest rate can only drop so far, before foreign countries are unwilling to invest their $ to back your dollars debt expansion. there will come a point (many are predicting 2 years, although we can see the signs now) that intrest rates will have to rise to attract more investment..

the problem will occur when the interest rate rises above the rate that the market is expanding at, which will cause many people to default on their loans/mortages etc. The market won't be able to support the hurting economy, and the interest rate will have to increase to attract more investment.. and then you have a REAL problem.

The great depression will be known as the 2nd greatest depression.
 

Renesis

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ESPNSTI said:
I don't know too much about currency, but it sounds like bad news.
Am I right in thinking that a weaker doller might help US exports though?
yep, but it's not a sign of a good economic health though
 

haha604

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I don't see how this is the end of the dollar. The world economy can handle another 20% drop in the value of the US dollar quite well, provided Asian governments are willing to let their currencies appreciate and relieve upward pressure on the Euro. I think its quite possible that the US-Euro exchange rate will remain relatively stable as major Asian currencies appreciate against the US dollar. Afterall the US has gone through troubled times in the 70s and 80s and has managed each recession quite well.

John Snow and his boss George Bush must have realized the mess they have created by now and would probably halt further tax cuts or spending increases. This deficit thing is why I want Robert Rubin back, in place of John Snow, famed for his corporate tax dodging practices, as the Secretary of the Treasury. Its a little strange these days to see the Democrats applying market economics better than the Republicans.
 

MPower

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The strength of the dollar can go two ways. Overall, I cant see how it really is an issue. If it weakens, we can trade to almost anyone, as countries like Japan and China (becoming the world's strongest economy). If it strengthens, it becomes more competitive with the euro.

I dont think that the USD will weaken any further. From what I have heard (from my father who exchanges currency for a living), the value of the USD has numerous factors, the biggest of which being interest rates. And with interest rates going to go up (or at least expected to), the value of the USD should go up. Now that is just one factor. You can not just calculate the value of the dollar on "ecoonomic health" but that is entirely not true. A weak USD does not equal a weak US economy. All proven by the economy of China.
 

haha604

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It can become an issue if investors lose confidence in the US dollar, causing the value of the dollar to fall and American interest rates to go up at the same time. If George Bush allows the deficits to grow bigger this can become a very serious issue, although I very much doubt he will make the same mistake twice.
 

CanadianLoonie

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THE THREE STAGES OF A DOLLAR COLLAPSE

By The Texas Hedge
Todd Stein & Steven McIntyre

November 16, 2004

texashedge.com

Our bearish views on the United States Dollar have been formed over years of watching what we view as reckless and incredibly shortsighted policy decisions by the Federal Reserve. The chief culprits of this attack on the greenback have been none other than Alan Greenspan and his band of merry sheep spearheaded by Ben ?Printing Press? Bernanke and Bob ?Lever up & Buy an SUV? McTeer. We have never been shy about our belief that the most likely outcome to be spawned from the monumental current account deficit, trade deficit, and other enormous debt imbalances in our country is a sharp and severe devaluation in the U.S. dollar. Globally, holders of dollars will seek to diversify into other assets. We have seen a bit of this as the dollar index peaked in 2001 at over 120 and has since dropped to 84.

We thought it might be useful to readers to lay out the various stages of dollar collapse we see coming down the pike. In particular, we will be looking for three divergences in the coming months as signals that the dollar collapse is strengthening and that the gold/silver bull market (still in its early innings) is gaining recognition by the masses, which will propel the yellow and gray dogs even higher. We will hit the highlights of these divergences in an effort to get them on everyone?s radar screen. The clear completion of each divergence should be viewed as bullish milestones for the metals.

Divergence One: Gold/Silver to Outpace Foreign Currencies

This divergence may already be getting underway in the most bizarre of sorts. Although the price of gold is up over 12% in the last year in terms of U.S. dollars, it is roughly flat in terms of the Euro and Swiss Francs. The same can be said for gold in Canadian dollars, Australian dollars, and Swiss Francs among others. Non-U.S. holders of gold have in many circumstances not seen any real appreciation in their gold holdings for the last year. Before this gold bull market is over, we believe this fact will change in a big way. From here it seems that highly certain that all currencies, particularly natural resource based economies with central bankers that have a clue, will continue to grind higher against the U.S. dollar.

However, the European Union is again showing signs that at the $1.30 level, their monetary leaders will grab the megaphone and try to talk the Euro down or at least slow its rise. Witness recent comments from European Central Bank head Jean-Claude Trichet, commenting that recent Euro vs. Dollar moves have ?tend[ed] to be brutal?brutal moves [are] not welcome.? The rest of the talking heads in the Euro zone have echoed Trichet?s whining last week. The last time the chorus wrung their hands this loudly, the Euro retreated from $1.29 to $1.16; this time we suspect the market will be wise to the boys crying wolf and the gravity of the dollar?s fundamentals will push the dollar even lower and the foreign currencies to fresh new highs.

Interestingly, we believe that even though foreign currencies will make new highs against the dollar, they will begin to drastically underperform gold. The value of gold in foreign currencies will rise, sparking even more buying around the globe as gold is the one asset that is no one else?s liability. Unlike its fiat brethren, no weak monetary heads will be complaining about the rise of gold. Sure some central banks will continue to sell gold, but we suspect that as gold becomes their best performing reserve, central bank selling will dry up as well.

The preservation of purchasing power that gold (and silver) offers will again become clear to a nation of investors, which when coupled with the soon to be live gold ETFs, should spark a continuation of the spectacular rally in gold that began in 2001. Non-U.S. dollar currencies will do well, but in the end, they face many of the same economic problems that the U.S. does and as such will be far more earth-bound than the precious metals.

Look for the outperformance of gold versus foreign currencies in the next leg of the dollar decline.


Divergence Two: Gold/Silver to Outpace the Base Metals

To date, the metals rally has included both precious and base metals in a similar fashion. Both have gone up by appreciable amounts since their 2001 nadir. Gold is up from its $260 low to its current $437 an ounce ? that is a 68% advance. The GFMS Base Metal Index however has more than doubled off of its 2001 low. The GFMS Base Metal Index has risen from 70 to 145 ? a 107% increase. Despite being up 68% over the last 3 years, gold has actually underperformed the base metals in aggregate, thanks to meteoric rises in commodities such as zinc, copper, and lead.

The fact that base metals have rallied just as strongly (if not more strongly) than the precious shows that a good deal of the broad metals? appeal over the last couple of years is based on the belief that the emerging industrial powerhouse ? China ? will suck up all of the world?s commodities. There is some truth to that and a lot of base metals were bouncing off depressed levels, but in the end, they are plays on continued robust growth in the world?s economy in the next couple of years ? something we would not want to bet on. Besides, anecdotal signs point to overcapacity on the horizon in China - at least in the short run.

In the weakening economy/stagflation type of environment that we envision, the desirability of buying base metals as a ?robust world industrial economy and China play? is zilch. As such we expect to see the new buyers of gold and silver that will push them to higher levels will not be blanket metal buyers searching for a China play, but rather those that sense the world?s fiat currencies are undesirable stores of purchasing power in the current environment.

As the world?s economy slows, look for gold/silver to diverge on the upside from base metals as the monetary nature attracts legions of investors.


Divergence Three: Silver to Outpace Gold

We continue to be extremely bullish on both silver and gold. In fact, as gold diverges to the upside from foreign currencies and base metals, it may well do better than silver initially. Over time however, we suspect that the superior fundamentals of silver and the fact that it is a much tighter and smaller market, will ultimately lead it to outperform even gold.


Initial flows out of the dollar will likely find gold to be the easiest non-fiat platform to store wealth. Likewise, the gold ETF will be approved before the silver ETF and will likely help the yellow metal attract the media and individual investors? attention. Silver may well lie below the radar for awhile longer, but eventually its supply/demand picture coupled with its own ETF could propel it to incredible heights.

Please note your authors are long gold and silver and foreign treasury bills, so you should take our opinions with a large grain of salt, given our bias. As the dollar collapse continues, we will be looking for these three divergences: 1) gold outpacing foreign currencies; 2) precious metals outpacing base metals; and 3) silver outpacing gold as all healthy developments in a vigorous and intensifying bull market for Larry Kudlow?s ?barbaric? relics.

http://www.kitco.com/ind/Texashedge/nov152004.html
 

CanadianLoonie

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Now to give you all a picture of what I'm talking about with some data from the charts....

Gold Market Update
by Clive Maund
November 20, 2004

Gold has now made a clear break above the key $430 resistance level and is in position to advance to the $480 - $500 area. This accords with the US dollar which, although oversold, looks set to plunge.

The 1-year chart for gold shows how the price has now broken well above the resistance at the double-top highs of last winter and spring. With this hurdle cleared the rate of rise is expected to accelerate into a "slingshot advance" as the parabolic uptrend driving the price higher gets steeper.



The 3-year chart gives us a target for the move at the upper long-term trendline, in the $480 - $500 area. This is a minimum objective as this larger uptrend can be expected to get steeper if a dollar crisis develops.





The dollar chart from 2001 is placed below the 3-year gold chart for comparison, note the different time scales. It can readily be seen how gold's breakout corresponds with the dollar's breakdown below support at its lows of last winter. Having broken down below this key support, the dollar now looks set to plunge to its lower long-term trendline shown on the chart.

The 1-year dollar chart is a grim picture - not only has the key support in the 84.60 - 85 area failed, as already mentioned, but the index also failed to find support at the return line of a potential intermediate downtrend channel, signalling extreme weakness. Being oversold did not save it, and will probably not save it going forward.



Many gold stock investors remain "spooked" by the underperformance of gold shares relative to bullion and the fact that shares have, so far, failed to break out to a new high, as can be seen on the 3-year HUI index chart below. I believe this is nothing to worry about and that continued progress by gold will lead to a sharp breakout above the key 260 resistance level on the HUI.



The return of the current Republican administration on November 2nd was a major bearish development for the dollar. Bush and the Republican Party may be popular in places like Kansas and Oklahoma, but they are disliked intensely and even feared and hated around the world - this is a statement of fact and has nothing to do with the personal opinion of the writer, but it is a fact that may contribute considerably to the choking off of funds flowing to the US. The United States is running huge deficits, and is now dependant on a massive influx of foreign capital to keep going. The US may call the shots militarily, but its creditors now call the shots economically and countries such as China and Japan could send the dollar into freefall anytime they chose to if they started to unload the vast quantities of dollar denominated assets they now hold on any significant scale. There is an argument that they would be shooting themselves in the foot if they did so as they would implode their major export market. Against this must be set the fact that there are many other fast growing markets to export goods to, especially in the rapidly expanding Asian region, but the main question now is how much longer these creditors are going to stand and watch as the value of their dollar assets haemorrhages on a gargantuan scale. The danger now, as our charts clearly show, is that there could be an all-out stampede to dump dollar assets, and possibly an unprecedented plunge, and I don't think I need to tell you the effect that would have on precious metal prices.

Many readers will have noticed a marked increase in mainstream media coverage of Iran's possible development of nukes over the past few weeks. This is very similar to the propaganda that was broadcast about the "weapons of mass destruction" before the attack on Iraq. It is considered unlikely that the US will attack Iran in the near future, due to its forces being bogged down in the Iraq quagmire, so it may be left to Israel, which has been supplied with ordnance for the purpose, to precision bomb the Iranian facilities. The most likely gambit will be to first attempt to deplete the Iranian economy through sanctions. However, Iran is not Iraq, and any military attack on it either by Israel or the US, which the Arab world regard as the same entity, could have dire consequences, including a huge spike in oil and precious metal prices.

http://www.safehaven.com/article-2234.htm
 

MPower

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There is a distinct difference between a country's citizen's hating American and a nation's government hating America. And as of now, I can only name two countries that hate American, and those are Iran and North Korea.
 

Bimmer

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I say we go back to the Gold Standard, it was more fun then, and instead of having Fort Knox (or w/e ur spell it, I've been there, my cousins are stationed there) as a tourist attraction, lets put it to use and the base its at. Man I remember when I saw the movie that James Bond was in with that guy that was stealing money from Fort Knox, it was good old days when John Connery was James Bond, the best James Bond to date. But nooooooooo why did we change to nothing standard, because we got greedy. :|
 

SPG900

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No.

Say $1.5 equals ?1 --> a $15 cd will cost me ?10
But if $1 = ?1 (this is a higher dollar) --> the same cd will cost me ?15.
 
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