“As much as these currency moves may contribute to global rebalancing on paper, I would just caution from a market perspective not to underestimate … the speed and size of currency moves,” ~ Mohamed El-Erian
By Catherine Austin Fitts
If you don’t watch the US dollar index, I recommend you start doing so.
The US dollar index is an index of the value of the United States dollar relative to a basket of foreign currencies: the euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona and the Swiss franc.
The index has been rising since the summer. It is correcting now. Given the strength of the rise, a short-term correction is to be expected.
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As the index rises, there is a correlated growth of financial newsletters predicting the imminent demise of the dollar. As the chorus grows, we are building towards a falling dollar Shriek-O-Meter.
I am writing this commentary to impart a strong, clear message. Ignore the shriekers and pay attention to prices.
Keep an eye on the US dollar index. And related prices. Did you know that the 20 year US Treasury ETF is up 20% year to date? Gold is down 3%.
Think about it. Where will gold be if the US dollar index rises through 89, or higher even if the US dollar eventually returns to parity with the Euro?
A lot of things can happen over the next year. One of the things that can happen is a continued rise in the value of the US dollar.
The dollar carry trade has grown up as a result of G-7 monetary policies, including the Fed’s QE I, II and III. More global debt has been borrowing cheap dollars.
With the Fed’s QE over, dollars are getting scarcer. If deflationary pressures continue – which is likely given a world struggling under a rising debt load – a lot of institutions could be chasing dollars.
The US can print dollars. The US dollar supply is abundant for those who control the printing press. However, that supply is not abundant for the people, companies and countries around the world that need dollars to pay interest and principal on US dollar denominated debt and derivatives. They can not print dollars. They have to spend their dollar reserves or earn dollars. Shrinking exports makes it harder to do so. Lower commodity prices make it harder to do so.
If interest rates rise, borrowing more dollars gets harder to do. The forces that manage the Slow Burn just may enjoy a financial transfusion from the closing trap. Ditto the US stock market. Ditto US real estate in markets where foreigners with dollar reserves are buying.
Among others, I recommend that you contemplate what a strong dollar scenario would do to your business and finances and be prepared to find the opportunities and manage the risks involved.
While you do, focus on price, not Shriek-O-Meters. Watch the US dollar index.
Related Reading:
Speculators Push Long U.S. Dollar Position to Largest Since
Wrapup 3-IMF, U.S. Encourage ECB, Japan Monetary Stimulus
