“It’s about time we had a look at the US Dollar” your editor shouted across the office to technical analyst Murray Dawes yesterday afternoon.
“Is it the steaming pile of cow dung that it seems to be?” we further asked. Well, Murray has revved up his fancy charting software to see what it tells him about the US Dollar Index.
You can read his analysis of what he calls the ‘US Peso’ below.
Until then, we thought we’d take a look at the ‘Greenback’ too.
So, we asked our self the same question we asked Murray, “Is it the steaming pile of cow dung that it seems to be?”
On face value the answer seems to be, yes. And odds are, after we’ve done a little more digging we’ll come to the same conclusion. But let’s go through the motions anyway…
You don’t have to look far to find a lot of nonsense written about foreign exchange rates. The trouble is, it’s usually the same nonsense.
In most cases the mainstream press struggles to make it past discussing the ‘carry trade’ or that a high/low Aussie dollar is good/bad for importers/exporters.
That’s pretty much the extent of what they’ve got to offer. But it shouldn’t surprise us. The mainstream press are pretty good at that.
The problem, as always, is they only look at what is immediately in front of them. In other words, they see a high Aussie dollar and announce, “that’s good for importers, and bad for exporters.”
And that’s it.
When the Aussie dollar falls they’ll declare “that’s good for exporters, and bad for importers.”
Then you won’t hear another thing about it until the dollar moves back to the other extreme.
But aside from that you get the accompanying ‘expert’ commentary from the self-proclaimed experts.
If you thought Barack Obama being awarded the Nobel Peace Prize made the award even more of an irrelevance than it already was, then the Nobel Prize for Economics is now clearly just a sideshow.
Last year’s winner Paul Krugman is a Keynesian economist. He loves government intervention. He loves bail outs. And most of all he loves stimulus packages.
In fact, he believes governments haven’t borrowed (stolen) and spent enough money.
If this phony recovery fails to hold, he’ll be the first one to claim it was because the government didn’t steal and spend enough taxpayer money. More should have been done.
But he’s also a big fan of a weak US dollar. As he wrote in the New York Times recently in an article re-printed by the local version of the NYT, The Age:
“The truth is, the falling US dollar is good news. For one thing, it’s mainly the result of rising confidence. The US dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it is falling again now that the fear is subsiding. And a lower US dollar is good for US exporters, helping the country make the transition from huge trade deficits to a more sustainable international position.”
Goodness me, talk about jumbled logic. Investors are so confident about the US economy that they are selling the dollar in droves.
Can you imagine that? It would be like us saying, “I’m so confident that BHP Billiton shares will go higher, I’m going to sell them today.”
But there’s that argument again, a weak US dollar is good for the US because it helps their exporters.
Is that really true? Is it really good to devalue a currency so that you can export more? Surely the weak currency means the US will import less and therefore it will help with the balance of trade?
Of course, what ‘experts’ such as Krugman are doing is just looking at the surface of an economy. He’s looking at what’s seen without appreciating what isn’t seen.
However, in an un-free economy this isn’t always the case. Because for the US as an example, the exporter may rely on importing parts of his/her goods before they are finished and then exported.
If these parts are being imported from say, Australia, then the cost to complete the goods before re-exporting will rise.
Of course, if the exporter is able to find a local US supplier for the parts then perhaps they will gain an advantage from the weaker dollar. But even then it’s not that simple, and it’s unlikely the exporter will gain the full benefit of the dollar’s movement.
The reason companies move their manufacturing offshore or source components from offshore is because it’s cheaper than the local product. That means it’s less likely there will be a local alternative.
Once one firm goes offshore to gain a competitive advantage, many more follow.
And it’s harder to re-establish local operations due to never-ending regulations that keep costs high.
But getting back to the value of a currency. It seems baffling that anyone would claim a weak currency is good. Surely the aim is to improve your standard of living and your wealth, not to diminish it.
And a weaker currency, contrary to Krugman’s claims doesn’t show a sign of confidence at all. It shows that investors see little value in it. They don’t want it.
You can’t blame them either. With interest rates almost at zero and government debt and spending spiraling out of control it’s inevitable the value of the US dollar will drop even further.
I mean, why on earth would you buy and hold US dollars as an investment? It’s not as though you’re buying it cheap, because it’s only going to get cheaper.
The reality is, when you have central banks and governments manipulating interest rates it has a knock-on effect to many areas of the economy.
When a central bank manipulates the interest rate lower and therefore causes the value of the currency to fall, they are directly punishing those individuals and businesses that prefer a higher currency.
And vice versa.
What you have is the government and central bankers picking the winners and losers, rather than the free market.
If any indebted economy like the US believes it makes sense to maintain a weak currency they are sorely mistaken. Already investors are proving they are happy to bail out of that economy now.
And for foreign investors who hold US debt, well they’ve suffered massive losses on these positions. It wouldn’t seem likely foreign investors will stand for much more of the same.
It’s more likely they’ll see better opportunities elsewhere, and keep dumping the US dollar.
As Murray outlines below an even bigger “exodus out of US Dollar assets is coming.”
The trade of the next decade as we mentioned a few months back is to Sell the US dollar, and buy… anything else!
Other Stuff on the Markets
The S&P/ASX200 closed yesterday at 4,785.70, up by 45 points, while overnight on Wall Street the Dow Jones Industrial Average dropped slightly by 14 points to 9,871.06. In Europe the FTSE100 finished at 5,154.15, down by 1.08% and the CAC40 was down 1.15%.
The price of gold in Australian dollars is trading at $1,171.87, while in US Dollars it is trading at $1,064.87. And the price of silver in Aussie dollars is $19.65 and in US Dollars it is $17.86.
The Aussie dollar dropped a little versus the US dollar, trading at USD$0.9086, and improved against the Japanese Yen JPY81.50.
Crude oil closed overnight at USD$74.15
For the biggest movers on the market yesterday click here…
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“”so 7 x 0.25% =1.75% minimum
does that add up to big biccckkies????????”
well let me answer it ..it does …
if 0.25% equal an extra say $1000 PER YEAR repayments
on average 300k loan as stated in a previous post
times that by 7 = another $7000 per year minimum & i would say to alot of people will be suffering
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