U.K. Announces Dumping of Dollar as a Snub
“The US dollar appears to be entering a long-awaited devaluation period to compensate for global imbalances. But this is also likely to spark a significant sell-off of US equities and bonds because many investors will not want to hold assets valued in a currency that is in decline.” – 2006
The Australian Central Bank raised its interest rates yesterday, which sparked a strengthening of many currencies versus the dollar. If there is no response from the Federal Reserve Bank, many will simply start dumping the dollars. OPEC for one, cannot continue to hold dollars as the reserve currency if there is no way to make use of them, i.e. U.S. products. Parking dollars in financial securities only goes so far. There is a rising trend with OPEC nations to purchase foreign goods instead of American goods.
Due to the lack of our infrastructure for a strong manufacturing sector, the dollar as a reserve currency days are numbered. We no longer are a mass producer of goods as we were in the 60’s and before. Without these goods, in which to use dollars, there is nothing to do with the dollar. A weak dollar then becomes not a commodity for the U.S., but an inherent weakness, which will lead to its own collapse. This is why the world is waiting for a response from the Federal Reserve Bank. If the sign they get from the Bank is that they are continuing with this trend of devaluing the dollar, then get ready for a domino effect: sell off of U.S. notes and securities; foreign currency strengthening versus the dollar; dumping of the dollar.
The Federal Reserve Bank is in a catch 22 however. On the one hand they don’t want to continue along the same path of providing too much liquidity for fear of hyperinflation, coupled with a weak dollar. On the other hand, they think the only way to combat inflation is to pump more money into the economy to remove the unemployment factor in the GDP. Raising interest rates of course would be the logical thing to do. However, the Federal Reserve Bank is under tremendous pressure to not just profit from the U.S. economy’s own problems, but to give into pressure to continue subsidizing the government and their socialistic monetary promises.
“Let them eat cake.”
I’m sure the Bank would like nothing better than to call in all the loans it made during the bailouts, raise interest rates, and just sit back and rake in the money. I’m sure the Fed would like to call in its loans worldwide that it made during the “economic” crisis and just sit back and rake in the money. Politicians would not want them to do that. They want to get reelected, so want the economy to “appear” to be strengthening, so they want the money to keep flowing from the Bank. Instead of fixing the 25% unemployment rate, through sound fiscal policy and a sound interest rate, to take the country back into a buckle-down status, they want to ignore the problem and just spend spend spend.
Investors are seeing the error of their ways. A weak dollar is causing stock prices to rise. At first, the uneducated investors thought it was a strengthening of the market, but even the obtuse are finally seeing the writing on the wall. Gold and silver are the obvious beneficiaries of this. Too long has gold prices been suppressed. With such a massive influx of investment from all sorts of traders, gold is set to see new highs. Gold is the only obvious choice to park your dollars in this economy. Once again, stocks are seen as a too risky venture.
Enter the Carry Trade
Before the carry trade was the Yen and the Swiss Franc. Now, the trend is the U.S. dollar as the carry trade currency. This is not a good thing. While one might think that everyone will be purchasing dollars for the carry trade, the reasoning behind it, is to purchase foreign financial securities, or foreign goods, or foreign businesses and trade. The dollar won’t be the impetus for financing the trade, it will simply be in the trade due to its low yield and lack of interest rate, i.e. a o% interest rate means, those borrowing in dollars will not need to pay back any interest. So slowly investors will be siphoning off trade away from the united states due to the low interest rates and the carry trade.
Will the Bank do anything to stop this? Will the Bank raise interest rates? Will the bank care that we are steadily losing global market share in goods, services, manufacturing and commodities? The answer is obvious: No. The Bank no more cares about the dollar as a carry trade than they do about a 25% unemployment rate. In fact, their response has been and continues to be, more devaluation of the dollar.
Before, manufacturers wanted a weak dollar so that their goods could compete with foreign goods. However, they are realizing their mistake now. People are still buying foreign goods, because now, American goods are too cheap: cheaply made; cheaply priced.
Now foreign nations are turning towards a policy of strong economies to safeguard against the fiasco we are going through. The Yen is no longer a carry trade currency and the current government has expressed a complete change in policy. They are heading towards a strong Yen. This is a complete reversal from their 1990’s policy. The irony is that in the 1990’s we advised them not to prop up zombie banks and corporations through stimulus. They didn’t listen and prolonged their own recession for a decade. Now the shoe is on the other foot and they are announcing a policy of a strong economy and strong Yen, no more propping up zombie banks.