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USD shoe about to drop?Chris Laird Also, there has been a spate of central banker's comments this year that CBs should not be accumulating so many dollars, but to move more into the Euro, and other currencies. The Mid East Oil nations are among them. And, the falling USD recently is causing holders of USD reserves to take losses. With China at close to $1trillion of foreign reserves, mostly in the USD, they have suffered roughly a 10% loss in their value compared to other currency alternatives. And the Mid East oil nations as well are taking losses, and are complaining, and so on. US/ China Trade Pressures There is continuing trade pressure by the US Congress for sanctions on China if it does not address long standing trade issues with the US, the value of the Yuan/RMB for one, and other issues such as market access for US products. But the most telling issue about the USD at this time is a meeting this week of a huge US banking delegation to China: Treasury secretary Paulson, Bernanke, and a host of other major US banking and trade figures and their entourages. So, why this level of meetings? It could well be possible that there is a consensus now by central banks that there will be some significant adjustments out of the USD, and that the USD will be allowed to fall. The hope is for a controlled decline. In light of the level of these meetings with China, I believe much of this has to do with coordination and battle plans for a mutually agreed fall of the USD. The other issue on the table will be how to combat any speculative front running of this event. For many years, the USD has never fallen below 80 on the USDX, a currency index that now heavily weights the EURO. Right now, the USD is again threatening to fall below that critical 80 level. If there is agreement that the USD must fall, with China and other central banks, the Yuan will be allowed to strengthen, the Euro will strengthen, the GBP and many other currencies. Of course, gold will strengthen as well. In fact, if the USD is allowed to drop below 80 on the USDX, but it is controlled, say, maintained to above 75 for the first 6 months, we will see gold rise by at least 50 bucks in the onset of this. However, it is not completely clear that the USD will actually be allowed to fall below 80. First, most large nations trading with us are very reticent to allow the USD to fall much. For example, the EU has repeatedly said they will intervene in currency markets to support the USD if the Euro gains much as the USD falls. Japan has unilaterally supported the USD in 04, and at other times jumped in, buying $billions to keep the USD up when it flagged near 80. They have done this when the Yen got near 110 to the USD. China has washed hundreds of billions of dollars of accumulated USD from trade, washing it with printed Yuan, and this is one reason for their astounding 18% money growth and banking problems... In fact, people who speculate that the USD will drop soon below 80 on the USDX had better be careful, in any event. But, this time, it may happen Nonetheless. There appears to be a consensus to finally allow the USD to fall below 80. China has telegraphed this repeatedly this year. Other central banks, from Russia (always down on the USD anyway) to the Middle East are baying about their accumulating USD hordes, and finally, there appears to be perhaps enough economic strength abroad for these nations to actually permit a drop below 80 on the USDX this time. The implications of this move are many. First, commodity prices, most primarily in USD, will rise. Inflation pressures will rise as a result globally. Interest rates will have to rise as well to compensate. Many of these goals are compatible with the economic strength and issues already in phase in much of the world. For instance, the EU wants to stall inflation, but cannot allow the Euro to strengthen too much vs the USD. But if the USD is allowed to fall, the US might have to raise interest rates anyway. That could allow further interest rate hikes elsewhere, like the EU, while allowing some US trade pressures to abate somewhat. Even if there is some US economic retraction due to higher interest rates and a lower USD, that could abate the inflationary pressures of a lower USD as well, as some demand for commodities eases. Speculator dangers So, many of these central banks are looking at the prospect of a lower USD as something feasible. But, that is only if the decline can be controlled. IF speculators get ahead of this, the USD could drop too fast, and cause severe financial panics and stock collapses due to liquidations out of USD financial investments to flee the declining dollar. It is not altogether clear that a speculative front run on the coming USD decline can be avoided. Just a few comments by Chinese central bankers led to a serious drop in the USD that scared a lot of people recently, when it dropped several points in a week or so to close to 82 on the USDX.  In my newsletter, I mentioned that the USD would be supported by central banks the following week above 80 on the USDX. That happened, but they may be just about ready to allow it to fall below 80 now. So, I believe one of the key issues of this very prominent meeting with the Chinese and the Fed and the US Treasury is to make plans to manage a declining USD. Certainly, Paulson, a very crafty and high powered former Goldman Sachs investment banker, who has a great deal of credibility with the Chinese, is a factor in favor of being able to pull off an orderly USD decline. In any case, this is a very big week for the USD. Another thing is that the holiday season could well be the perfect time to implement such a USD lowering plan, since many market participants are out for a long holiday. Be ready for surprises Also, be ready for surprises. When China cut the Yuan loose in 05, they surprised the whole world and were able to avert a costly speculative front run. This time is certainly no different, and this time it is a matter of readjusting the USD not merely the Yuan/RMB. This time around the world reserve currency is about to be taken below the critical 80 level on the USDX. Be prepared. It is a very risky time because of the incalculable nature of this pending USD change for financial markets. If this is not kept orderly, there will be serious turbulence in the financial markets, and this is why that very unusual group of US bankers is going to China this week. The PrudentSquirrel Newsletter is Chris Laird's weekly gold macro economic newsletter. Stop by and have a look. Chris Laird 321gold Inc |
