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Author: Dr. Alex Cowie Daily Reckoning Australia
No US Dollar rally for now
US Dollar index (the last ten years)
A few weeks back we discussed the possibility of US dollar rally. With
good reason. The chorus of the majority is singing the decline of the
dollar in full voice. When everyone in the markets is in agreement,
everyone is usually wrong.
However there is no sign of the dollar rallying just yet. In fact if
you look at the dollar index above (black line), you can see that the
US dollar would have to have a considerable rally to get back to where
it was at the start of the year.
The red line shows the two hundred week moving average demonstrating
the long-term trend. The blue line shows the fifty week moving average
which demonstrates the short-term trend. Just like in Ghost-Busters,
when the streams cross, it's generally bad news.
It signals a fundamental change. The first intersection in 2003
signalled the start of another five years of downtrend. The next time
lines crossed a few months ago signalled the end of the dollar's
mini-rally. Now the lines are crossing again, suggesting the dollar is
in for another dose of freefall.
The enigmatic Marc Faber
is known for his frequently correct predictions of major market events,
such as the 1987 crash. He has been making his bearish views on the US
dollar clear for some time. He startled Bloomberg viewers a few months
ago when he said, "I don't think the US Dollar will be replaced right
away as the reserve currency or as the world's most important currency.
But I think the importance of the US dollar will diminish, and over
time the US Dollar will become worthless. That is a fairly high confidence prediction that I have."
He went on to say, "McDonald's has a better credit rating than the US
government. The US government is essentially cash flow negative."
He's not the only one who has his concerns about the falling dollar.
This week, Liu Mingkang, the chairman of the China Banking Regulatory
Commission had a go whilst U.S. President Barack Obama was in town. He
is also justifiably critical of the protracted loose US monetary
policy, and the global bubble it is creating.
He said, "The continuous depreciation in the dollar, and the US
government's indication that, in order to resume growth and maintain
public confidence, it basically won't raise interest rates for the
coming 12 to 18 months, has led to massive dollar arbitrage
speculation."
China has to take some blame as well. China denied that the Yuan was
manipulated when U.S. Treasury Secretary Timothy Geithner made
accusations in the past. Dominic Strauss Kahn, the Managing Director of
the International Monetary fund believes that the currency is still
fundamentally undervalued.
This gives China an unfair trade advantage. Chinese exports are kept
artificially cheap relative to other exporters. Exports are nearly 40%
of China's GDP, and the reason why it is sitting on over $2 trillion of
foreign exchange reserves.
Not only is the Yuan kept artificially cheap, but it is pegged to the US dollar.
So as the dollar goes down, the Yuan goes down too. For all of his
diplomacy, President Obama doesn't seem to have changed China's mind
about its policies or even to co-operate for the financial good of the
rest of the world (assuming it's in the world's interests to see a
stronger Yuan).
The response from China has been lukewarm. But why shouldn't it be? The
US is hardly in a moral position to be able to lecture on financial
management.
With nothing resolved, we can expect the Dollar-Yuan's destructive and
co-dependent marriage to drag on. The dollar will keep heading south,
and the Yuan will keep trailing it lower. Bubbles will keep growing,
and gold will keep glowing.
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