How Much Lower Could the US Dollar Go?

Before I get on to the US dollar, a quick note about today’s GDP number. It won’t be released until after today’s Money Morning has been delivered to your inbox, so we’ll reserve most of our comments until tomorrow.

However, we will state one thing. Based on the trade figures yesterday, it provides proof that artificial stimuli don’t benefit the economy at all.

In fact, it is more likely that if it wasn’t for the stimulus packages, the trade figures would have been even better, and Australia would not have been at risk of going into a recession at all…

More on that tomorrow.

Well, the US dollar is trading around the support level that Gabriel mentioned in yesterday’s Money Morning. That was based on the weighted US Dollar Index.

Against the Aussie dollar there doesn’t seem to be any support…

Click to enlarge

Or should that be resistance?

Anyway, we’ll leave the technical wizardry to our Swarm Trading technical analyst Gabriel Andre. But to us it just appears that the Aussie dollar is climbing its way back to where it was trading before the “flight to safety” happened towards the end of last year.

As the foreign exchange markets stand this morning, the Aussie is trading at USD$0.8200. Remember, it wasn’t so long ago that US dollar bulls were predicting the Aussie would fall to USD$0.50.

There was only one problem with the US dollar bull argument. It was all based on the assumption the global economy could not survive without the US consumer.

It was based on the assumption that China would not make anything if it could not sale things to the US consumer.

Gradually, that is being proved to be a complete fallacy.

And fortunately, Australia has the ‘get-out-of-jail-free’ card from the resources industry. The only threat to Australia’s advantageous position is if credit for the economic revival is claimed by the government and that encourages them to keep spending and keep on propping up chosen sectors of the economy.

However, that’s tomorrow’s subject so we won’t go any further on that score…

But although it is true the Aussie dollar is strengthening due to a new resources boom, it is equally true that the US dollar is being terminally weakened.

Reports late yesterday were that US treasury secretary Timothy Geithner was laughed at when he told students at Peking University that China’s US dollar investments were safe. Are the reports true? We don’t know. But, based on the fact that your editor laughed when watching this interview with CNBC suggests there could be something to the report.

The hilarity really starts with CNBC presenter Steve Liesman’s question at the 1 minute 2 second mark…

“I’m actually hearing quite a lot of confidence… in the basic policy framework we’ve undertaken” – Tim Geithner

We think he’s serious too. We think he really believes that handing hundreds of billions of dollars to AIG, Citi Group, Chrysler, General Motors and others is a positive step. And that ‘printing’ the money to do it is even better!

How much lower could the US dollar go? In one respect it’s already worthless. That’s if you compare it to the price of gold. Before the end of Breton Woods, the price of gold was less than USD$40 an ounce.

Today it is trading at USD$983 an ounce.

In other words, if you had USD$80 in 1970 and kept USD$40 in your wallet but bought one ounce of gold with the other $40, today you would have USD$1,023. Yet the cash component would have shrunk from being 50% of your wealth to only 3.9% of your wealth.

But what is the equivalent purchasing power today of your 1970 USD$40? Well, in order to get the same purchasing power, you would need USD$221 in today’s money. Simply put, the value of the US dollar has declined by over 80% in 39 years.

The value of gold on the other hand has increase nearly five-fold in terms of its purchasing power. That means, someone holding gold for the last 39 years could purchase nearly four times as many things today as he/she could have done back in 1970.

Have I made that more complicated for you? Hope not.

The US dollar has already been devalued to such an extent that it won’t take much more than a nudge to tip it into oblivion.

And if the US government believes China will never allow that due to the amount of US dollar investments (mainly treasuries) it holds, it better think again. Our guess is the Chinese have already crunched the numbers and written off the value of those investments anyway.

Sure, it will hurt them not to get their money back, but with the potential for massive growth in the domestic Chinese economy and a stronger recovery in other less indebted nations, the further collapse of the US dollar will soon seem fairly inconsequential to the rest of the world.

Other Stuff on the Markets

The S&P/ASX200 rose by 1.56% yesterday, while there was a relatively flat night on Wall Street with the Dow Jones Industrial Average adding 19 points. But in Europe the FTSE100 fell 0.65%.

The price of gold in Australian dollars is trading lower at $1,199.07 thanks to the stronger Aussie dollar, while in US Dollars it traded higher at $983.12.

The Aussie dollar continued to strengthen versus the US dollar and Japanese Yen, trading at USD$0.8200, and JPY78.40.

Crude oil held steady overnight, closing at USD$68.17.

For the biggest movers on the market yesterday click here…

And today on the economic calendar we have the Australian GDP number.