“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…
{ 11 comments… read them below or add one }
“”"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.”"”
obammmy has of yet, done nothing,,he’s just a puppet , a patsy & he gets the nobel peace prize ,,for what?/
i am really disappointed with him & democrat cronies
trying to white-wash the BS
I have only just read through this article. It is little more than just another simplistic and simple minded treatment for a complex subject. For example, there is no mention or accounting for the benefits that accrue in spades to the US through inflating the value of the massive foreign debt away. The US has borrowed trillions and trillions from their lenders, and the plan is to pay them back with gutted dollars, effectively paying them, if they are lucky, 10c worth in purchasing power for every dollar they borrowed.
I mean, everybody knows and talks about this as the primary reason why the Fed is inflating, and on the first reading of Sayce’s article I did not catch a glimpse of this reason being analysed in any detail. Forget about import – export considerations. At best, it is a secondary reason for inflating the USD. The primary reason is to inflate the debt away. Miss this, and you are missing the bus that runneth you over.
all you seem to do is call a crash for the property market or the share market, but every day all i see is property galloping higher and higher and the same with the stock market, obviously your right and everyone else is wrong, lol.
So true, Jason. But guess what sells newspapers, ……..errr, advertising space on your website!!! Never let reality, as they say, get in the way of a good story.
That may be true for the time being, Jason. The government has a vested interest in the economy performing well, so they’ll do what they can to stave off a recession. So far, they’ve achieved their aim. But I think Sayce’s point is that the underlying fundamentals are very weak. So the issue becomes how long this can all continue.
Kris has indicated that the government could continue for some time yet and that’s probably true. But beneath the covers, it’s all unraveling. Other people think that the economy has rebounded and is undergoing a fantastic recovery. Who knows? We’ll see in time.
I do know that the mainstream media provides very little substantive analysis of the situation. So it’s good to get a few different perspectives from people who like to dig a little deeper.
Yes, with all the hype and boom from mainstream media, and with all the gloom and doom from MM and DR, we are uniquely well positioned here for being totally confused …………….
errrr…… to get the complete picture, lol.
Part of the problem, and excuse me for being vague or out of my depth here, is the supposition that the traditional relationship between the underlying economy and the financial sector remained and remains the same. According to that supposition, the financial sector thrives when the economy thrives and will suffer when the underlying economy suffers.
I suspect that this is no longer the case, and at least that it is no longer the case to the degree that it used to be. No. Today, if the underlying economy gets sick and is unwell, it will be tapped and sucked dry of all sustaining juices in the interests of keeping the financial sector alive and healthy.
I am right, then the financial sector will continue to do well and will keep coming up with fantastic numbers for headlines for a very very long time, even while all along the underlying economy cannot get a leg up. Part of the problem for the underlying economy, in fact, is that all its energy and vitality continues to be sucked out to sustain the parasitic financial sector. Correct me if I am wrong.
In that light, there is perhaps another way of thinking about which part of the economy really is a zombie. There is much talk about zombie banks, but the bankers are doing just very fine, thank you, and without having to risk money by lending, while it feeds off a depressed and barely breathing economy. It is not so clear to me which one is the real zombie.
7 extra interest rates a forecasted in near future ,to be implemented by gLEN sTEVENS,,,,,,,,,,
WHY???????????????????
because to make a dent ,any headway on this huge astronomical debt ,well much more payments have to occur
so 7 x 0.25% =1.75% minimum
does that add up to big biccckkies??????????????????
I posted a response that, etch, but it does not appear to have come through. Must have gotten stuck somewhere, or maybe I am now being audited.
“”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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