Saturday, March 12, 2011

U.S. Dollar Drops Against Euro Again

The euro extended gains against the U.S. dollar on Friday after euro zone leaders came to an agreement on a competitiveness pact.

The euro hit $1.39 EUR=, up 0.8 percent on the day, according to Reuters data. Short covering played a major role in strengthening the euro zone single currency throughout the majority of the session, according to strategists.

The euro zone leaders reached a deal to establish higher retirement ages, more flexible labor markets and debt and deficit limits for euro zone countries.

The deal is expected to be officially adopted at a full 27-nation European Union summit on March 24-25.

Friday, March 4, 2011

U.S. Dollar to Continue to Fall in Value

The U.S. dollar is likely to fall in the week ahead as investors continue to bet that interest rates in the euro zone will rise ahead of those in the world's largest economy.

U.S. February jobs data came in a touch better than expected on Friday but disappointed investors who had hoped for an even stronger report. For details see

Investors see strong U.S. jobs growth as necessary for the Federal Reserve to end its second round of quantitative easing and instead tighten monetary policy by raising rates.

The U.S. situation is in sharp contrast with that of the euro zone, where the zone's common currency is likely to remain supported after European Central Bank President Jean-Claude Trichet strongly hinted at an interest rate rise in April, bolstering the view the ECB will tighten monetary policy before the Fed.

"We had Trichet warning Thursday that the ECB is considering a rate hike and perhaps the start of a rate hike cycle," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "The U.S. job number came in as expected and provided little direction to the market other than it did not disappoint and that will support risk appetite."

Full Story

Thursday, February 24, 2011

Euro Rises Against Greenback on Interest Rate Differentials

The dollar fell broadly Thursday as traders opted for the safety of the Swiss franc and Japan's yen amid ongoing turmoil in the Middle East and North Africa.

Meanwhile, expectations for widening interest-rate differentials pushed the euro to a three-week high against the dollar.

The dollar sank to a record low against the franc of CHF0.9234 as violence increased in Libya and fears increased that unrest in the Middle East could spread to more oil-producing nations like Iran and Saudi Arabia.

"We continue to focus on the issues in the Middle East," said Aroop Chatterjee, chief foreign exchange quantitative strategist at Barclays Capital in New York. "Even though we've seen a bit of stabilization in oil prices, in the currencies market, [investors] still favor safe havens."

The franc has become the most popular safe-haven option during times of geopolitical risk. It also rallied against the euro Thursday. The yen also was bid higher against the dollar and euro thanks to its perceived safety.

Oil prices climbed above $100 a barrel early in the global day on the New York Mercantile Exchange, leading to the dollar's record weakness against the franc. But even as oil prices have backed off that lofty level, currency investors continued to favor safety.

The situation in the Middle East appears to be far from stabilizing, so the flight to safety is likely to continue, analysts said.

Full Story

Yen Nears 3-Week High, Franc Climbs to Record on Libyan Unrest

The yen was about 0.4 percent from the strongest level in three weeks against the dollar and the Swiss franc climbed to a record as an uprising in Libya sent oil to a 29-month high, boosting demand for safer assets.

The yen and the franc headed for weekly gains against most of their major counterparts as stocks and commodities dropped worldwide. The dollar traded within 0.2 percent of a three-week low against the euro before a report forecast to show U.S. pending home sales declined in January.

“It’s a new scenario where the market is battling as global economic growth is being thwarted by higher oil prices, and that’s being reflected immediately in the U.S. dollar,” said Kurt Magnus, executive director of currency sales at Nomura Holdings Inc. in Sydney. “The Swiss franc and yen will continue to do well, they are incredibly safe-haven currencies.”

The yen was at 81.93 per dollar as of 8:10 a.m. in Tokyo from 81.89 in New York yesterday, when it touched 81.63, the strongest since Feb. 4. It has gained 1.5 percent this week against the dollar. The franc climbed to a record 92.28 centimes per dollar before trading at 92.55 from 92.64 yesterday.

Full Story

US Dollar Wavers on Surging Oil Prices, Weakens Against Swiss Franc

The dollar nursed heavy losses early in Asia on Friday, hovering above a record low versus the Swiss franc as investors sought safety in other currencies on fears the unrest in Libya will spread to other oil producers.

But a sharp retreat in oil prices from 2-1/2 year highs, sparked by an unsubstantiated rumour Mummar Gaddafi had been shot and Saudi Arabia's assurances it can counter Libyan supply disruption, could offer the dollar a brief respite.

"That safe-haven trade of going long Swiss may just turn around a little bit," a trader at a U.S. investment bank said.

Higher oil prices are seen as having a bigger impact on the U.S. economy given it's reliance on consumer spending to drive growth.

The dollar last traded at 0.9250 Swiss francs , having hit an all-time low of 0.9234 francs on trading platform EBS overnight. It has fallen nearly 4.8 percent against the franc in the last two weeks, its worst showing since June.

Full Story

US Dollar No Longer Safe Haven?

The US dollar has traditionally been a safe-haven asset, meaning whenever people are afraid, they sell ‘risky’ assets and flee to the safety of the US dollar. The same goes for US Treasuries.

Indeed, at the height of the global financial crisis (right after Lehman Brother’s bankruptcy in September 2008), both the US dollar and Treasuries surged. The Chicago Board Options Exchange Market Volatility Index (VIX) also spiked at that time. In uncertain times, the VIX is probably the purest measure of the market’s fear because it tracks expectations of volatility in US stocks.

Meanwhile, risky assets – those most susceptible to an economic downturn, like industrial commodities, junk bonds, small-cap stocks – plunged.

In the period after the zenith of this panic, the value of the US dollar, US Treasuries, and the VIX continued to strongly correlate with the resurgence of fear and uncertainty in the global financial markets.

However, starting the week of February 21, 2011, this pattern appears to have broken down.

Full Story

The US Dollar Ready to Collapse?

The turmoil across North Africa and the Middle East is threatening not only to overthrow aging dictatorships, autocracies and monarchies, but also to upset the geopolitical balance between the countries of that region and the Western powers that has existed since at least the 1950s. For the West, the issue has always been the security of oil. For the US there is a second issue, and that is the security of Israel. Now both are under threat.

Some 56 per cent of the world’s oil reserves are in the Middle East, with another nine per cent in Africa. Therefore, unrest in the region could be the catalyst that sets off a global monetary-oil shock. The unrest in Libya has sparked a sharp rise in oil price. Libya holds the world’s ninth-largest reserves and is the twelfth-largest exporter, providing about two per cent of the world’s daily oil supply. Not large and it is possible that Saudi Arabia could pick up the slack but it sends out a wave of uncertainty and it is unknown where the next outburst might occur.

Saudi Arabia is the world’s second largest producer, behind Russia. Saudi Arabia exports roughly 75 per cent of its production. If the unrest spreads to Saudi Arabia then all bets might be off the table as to how high oil prices can go.

Saudi Arabia is governed by an absolute monarchy which rules by decree. While its people are generally well-off, it has a minority Shia Muslim population (about 20 per cent), largely employed in the oil-producing regions, who are at the margins of the society. Saudi Arabia has a poor human rights record and its Wabbabi brand of Sunni Muslim religion has often been noted to be behind alleged terrorist organizations. Unemployment is high at just under 11 per cent, although that is better than most Arab countries.

The US is the world’s largest consumer of oil, at roughly 19 million barrels per day. It imports almost 10 million barrels per day. China is now the second-largest consumer. Among the top 15 consumers we also find Japan, Germany, France, Canada, Italy and the UK. Yet outside of Canada and China (which, like the US, produces roughly half of its daily consumption and is also the world’s third-largest producer), none of the others are in the top 15 for production. And amongst the Western economies, only Norway and Canada are listed in the world’s top 15 exporters.

It has often been said the US dollar is a petrodollar. That is to say, it is earned through the sale of oil. Oil-producing countries such as Saudi Arabia and Venezuela, which peg their currencies (within a band) to the US dollar, are as result quite dependent on the value of the US dollar. These countries and many others earn large amounts of US dollars because of their oil production.

The US dollar is also the world’s reserve currency. All commodities are priced in dollars – not just oil. It is the most marketed currency in the world and it is owned more widely than any other currency. One would therefore believe that a strong dollar is not only in the interest of the United States, but everyone else as well.

But the US dollar is also a fiat currency. A fiat currency has value only because the government says so. The Latin word fiat translates as “let it be done”. Thus, the value of money is dictated by government decree.

Today, all national currencies are fiat currencies. The trend began in August 1971 when President Richard Nixon took the US dollar off the gold standard thus also taking the world off of the gold standard. Increasingly from then on, money was whatever a government said it was. As such it has no real value except being declared legal tender.

Fiat currencies have a long history, mostly of failure .The Romans didn’t have paper money but they developed an early form of fiat by constantly decreasing the amount of silver used in the denarius, their main medium of exchange. They continued this debasement until the coinage became intrinsically almost worthless.

The Chinese were the first to issue paper currency in around the tenth century but eventually they printed so much that hyperinflation occurred and their currency became worthless, even though its usage lasted close to 400 years.

History is respite with the failure of fiat currencies. The most recent example was collapse of the Zimbabwean dollar, and a famous example was the Weimar Republic of Germany in the 1920s.

Fiat currencies have a history of ending in hyperinflation – if a country starts printing money excessively, it is often on the road to ruin and hyperinflation. And this is the United States today. The US has unparalleled deficits and debt; it has increasing expansion of its money supply, using a fiat currency; and it is being misleading about its true economic situation through its published economic statistics.

But it also has the world’s reserve currency, and international trade is carried out in US dollars. Any country buying oil, for example, must first convert its currency into dollars to pay for it. The selling country receives those dollars, which are often recycled right back into purchasing US debt, so that the selling country does not adversely impact its own currency.

But the US dollar is a declining currency. In the last 100 years it has lost over 96 per cent of its purchasing power (this process accelerated after 1971).

Many items, including Social Security payments, are tied to the reported rate of inflation. With a much higher rate of inflation, many items would have increased in price faster and the US Treasury would have had to pay out far higher entitlements.

The recalculation of the inflation numbers were provided by That chart suggests that the US dollar has lost over 98 per cent of its purchasing power over the past 100 years.

Many would say that it doesn’t matter, that society today is far better off than it was 100 years ago. And it is, and more appear to be joining the middle class. But technological advances have changed society in a dramatic way from 100 years ago. That and lots of money provided by a rapidly expanding money supply and debt all courtesy of a fiat currency. With nothing tangible to back money, money intrinsically has no value – except what the government says it is.

But with the explosion in debt and money and the decline in the purchasing power of the US dollar, society has become more divided. Income and wealth is increasingly concentrated in fewer and fewer hands. During the financial crisis of 2008 the bailouts went to the financial institutions (and corporations) that were either indirectly involved or directly involved as the cause of the crisis. The taxpayer (public) footed the bill.

Meanwhile the housing market collapsed with tens of thousands (millions?) losing their homes to foreclosure and tens of thousands lost their jobs. General wages have been stagnant for at least the past two decades and those living on fixed incomes (pensions) have seen a constant decline in their living standards. Meanwhile, those involved in the creation of money particularly at the banks and investment management companies have seen an explosion in their wealth and pay packages.

The unemployment rate soared and while the headline unemployment rate (U3) in the US is at 9 per cent, the Bureau of Labour Statistics U6 number is closer to 17 per cent and have calculated that based on calculating unemployment as it was it was done in 1990 the actual rate may be closer to 22 per cent. The current U3 number leaves out longer term unemployed, part time workers looking for full time work and very long term unemployed. If your unemployment insurance runs out the person falls out of the U3 number to the U6 number.

Today, with the future liabilities of Social Security, Medicare and Medicaid estimated (conservatively) to be about US$50 trillion or (more liberally) at upwards of $200 trillion, the US, with a debt at over $14 trillion and rising, has little chance of ever recovering or ever being able to pay it back. It has been said that the US could tax 100 per cent of income and still not be able to cover its commitments.

Further, the world is rife with imbalances. The US is the largest consumer in the world and imports heavily, creating huge trade deficits. It also runs huge budget deficits to finance entitlements and the Pentagon that finances the war machine. The US dollars circulating throughout the world, either because of general imports or because of oil, are recycled back into the US to purchase their debt. All of this appears to have worked reasonably well over the years but now the model is coming under severe stress. These global imbalances are not only causing problems for the US they are causing problems for other countries as well.

If the US were any normal country, its currency would now be in complete collapse and it would be arranging for IMF bailouts such as Greece and Ireland saw recently. But because it is the world’s reserve currency, the US has one big advantage: it can just print more dollars.

This strategy has unnerved the holders of US debt, led by China, which is estimated to hold almost $900 billion as of December 2010. Japan also holds almost as much. The UK has over $500 billion. Almost 60 per cent of the US debt held by foreigners is in the hands of just those three plus the oil producing nations led by Saudi Arabia. Of the total US debt of over $14 trillion, over $9 trillion is held by the public and roughly half of that is held by foreigners.

No wonder there are calls for an end to US dollar hegemony and a new Bretton Woods agreement to determine a new world reserve currency, and possibly even bring back a gold standard. The calls have ranged from the IMF, the World Bank, and many countries including France and Germany and of course China, the country that has the most to lose, given its large holdings of US dollars. Even Saudi Arabia has joined a group of countries seeking an alternative for the pricing of oil solely in US dollars. China and Russia are now conducting trade between themselves in Yuan and Roubles.

US debt is vulnerable to a downgrade as well. The IMF and the rating agencies have issued numerous warnings about the US debt situation. The effect of the US losing its AAA rating could be a financial earthquake. The US is also approaching its legal debt limit and, with the rift in Congress, the Republicans have threatened not to grant a new, higher debt limit. This could in the worst case result in the shutdown of government and a US debt default. This is not to predict that any of this will happen, but only to point out that it could.

Some are also saying that the so-called quantitative easing, or QE, could spiral the US into hyperinflation. While there are currently few signs of it, an event such as an oil shock in the Mid-East could trigger severe inflation which in turn could trigger further QE and start an acceleration in monetary inflation. Sharply rising oil prices have a history of causing recessions so it could stop the current feeble recovery in its tracks. An economy reeling from higher oil prices plus rapid monetary inflation could soon spiral out of control.

In the midst of all of this it is no surprise that gold has soared over 450 per cent in the past decade. Although relatively flat thus far in 2011, gold is up almost 28 per cent since the end of 2009. It is becoming an alternative currency. The world’s central banks still hold some 30,000 metric tonnes of gold, and investment demand for it has brought investment holdings in line with what is in the world’s central banks. In many countries, particularly in Asia, gold is seen as a savings vehicle rather than the speculation it seems to be viewed as in North America.

It is not so much that gold prices are rising but that fiat currencies led by the US dollar are declining. The chart of gold shows the stair step action that has taken place since the double bottom lows of 1999 and 2001. The action since that time has seen a series of triangular patterns form that continually break to the upside. And gold is rising not only in dollars but in all currencies, as the series of charts below attest.

Finally not only is the US Dollar Index declining the trade weighted Dollar Index is also falling. The trade weighted Dollar Index called the Broad Index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. In some respects this more fairly reflects the value of the US dollar then does the more broadly watched US Dollar Index. The US Dollar Index is a weighted valuation against a basket of 6 major free trading currencies. Notably the US Dollar Index excludes the Chinese Yuan.