US dollar

The dollar has rallied strongly since Bernanke announced his money printing scheme in early November. Things haven’t exactly gone according to plan for Ben. He’s trying to lower the value of the dollar to generate inflation and boost export competitiveness.

But he’s forgetting the minor point about the US dollar being the world’s reserve currency. In times of economic stability, the US dollar will generally trade according to domestic fundamentals. In times of turmoil though, it retains its safe haven status.

Because the euro is under all sorts of pressure, capital is now flowing back to the US dollar. It’s all relative in the world of currencies and as bad as the US dollar looks, it’s not as bad as all the other major currencies.

If there’s one lesson to be learned from the euro crisis it’s that problems begin at the core. The US dollar is at the epicentre of the global economy. The peripheral currencies (euro, yen) will likely come under major pressure before the greenback faces its day of reckoning.

But one thing is for sure, the dollar is not as good as gold. Gold is in a consolidation phase at the moment and just doesn’t seem to want to put in a decent correction. Dips are bought with gusto. It’s a sign of a powerful bull market when everyone seems to be waiting for a correction and it doesn’t happen.

The bull market in gold is the mirror image of the bear market in government policymaking and fiat currencies. The trend has a long way to run yet.

Greg Canavan in Sydney for The Daily Reckoning Australia

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