The negative speculative sentiment, coupled with the bullish and growing position of the commercial traders, could fuel a forceful rally in the US dollar, says Andy Waldock.
The Federal Reserve Board is printing money at an unprecedented rate. The ECB is following suit. The Bank of England and China are both cutting rates to spur their economies and global sovereign debt is piling up like manure behind the elephant pen. Clearly, our currency is being devalued by the day. Some would argue that there’s a race to devalue among the major global currencies as the G7 nations attempt to boost exports and spur their respective domestic economies. Tangible assets like gold and silver or soybeans and crude oil may be the only true stores of value left in an increasingly wayward world. We read this every day. The truth is far less dramatic. In an ugly world, the US dollar is the prettiest of the ugly sisters at the ball.
The US Dollar Index is exactly where it was four years ago. This is interesting considering that the aggregate money supply in the US as a result of the quantitative easing programs has nearly doubled since the housing market collapsed. Theoretically, doubling the supply of US dollars should mean that each new dollar is worth half as much. Take this one step further and it’s logical to assume that if each new dollar is worth half as much then it should take twice as many dollars to make the same purchases that were made in 2008 yet, the Consumer Price Index is only 4.5% higher than it was then. Finally, I would suggest that considering the growth of the money supply and its characteristic devaluation, we should see an influx of foreign direct investment picking up US assets at bargain basement prices. While logical, this is also incorrect as the US Department of Commerce shows that foreign direct investment only exceeded U.S. investment abroad in six out of the last 20 years with 2005 as the most recent.
What has happened through the artificial manipulation of interest rates in the world’s largest market is that the US dollar has begun attracting large amounts of money as US and global investors park their cash while waiting for clarification on the world’s major financial and political issues. Real interest rates in the US are negative at least 10 years out. The Eurozone is no closer to resolution. China is in the midst of changing leadership in a softening economy. Finally, what was an assured re-election of President Obama is now a legitimate race.
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