Dollar Market Update
The Dollar Stares into the Abyss
Clive Maund
29 November, 2004
As the dollar leaves behind the support in the 84 - 85 area on
the index, the rate of decline is accelerating. The big questions
now, of course, are "How far will it drop?" and "Are
we in for a full-blown dollar crisis?" The simple answer
to these questions is "a very long way" and "yes," respectively. Various factors are
coming together to propel the dollar into a decline of seismic
proportions that is expected to destroy its status as the world
reserve currency and create conditions of economic crisis in
the United States.
The United States is a country
that has been living way beyond its means for a long, long time,
and has been able to get away with it until now because of the
dollar's reserve currency status, and also because of the curious
appetite of foreigners for US assets and securities. The massive
inflows of capital from the rest of the world, currently running
at about $1.5 - $2 billion a day, have enabled US consumers to
go on consuming in a low interest rate environment as the deficits
have snowballed to massive levels. This is clearly a game that
can only continue as long as confidence is maintained, confidence
in the dollar, and confidence in the US. Vast quantities of US
debt and dollar financial assets have been created and ingeniously
packaged and marketed to foreigners who are right now waking
up to the harsh reality that they have been played for suckers
and are about to get stuck with this atrophying junk. They have
delivered goods and services in the expectation of eventual fair
payment, and are right now being defrauded out of a sizeable
percentage of their earnings by the falling dollar. In this sense,
the US government is laughing up its sleeve as the gullible foreigners
learn about the sophistications of high finance the hard way.
While these foreigners may be a bit slow, they are not completely
stupid - the writing is on the wall and the race is on to offload
dollars and dollar assets to whatever clowns will buy them, while
there's still a chance. Due to the staggering quantity of these
assets worldwide, there is clearly an acute risk of a vicious
circle of forced liquidation creating a downward spiral, possibly
of biblical proportions.
There is another dimension
to the dollar crisis now almost upon us that should not be overlooked
or underestimated, and that is the effect of the tremendous loss
of esteem and respect from the rest of the world that the United
States once enjoyed, until just four years ago. It seems like
an age ago that Bill Clinton was President in the relatively
trouble-free times of the 90's. Bill Clinton was a very likeable
personality and was very popular around the world. His reputation
was besmirched by the affair with the intern, but many people
largely forgave him for it, especially as the economy was apparently
doing well. Unfortunately, the global reputation of the US has
plummeted since that time, for reasons that are well-documented
elsewhere, with the result that attitudes towards the US are
hardening, so that consideration of the impact on the US of heavy
selling of dollars and dollar assets will be much less of a factor
in the decision to liquidate than would otherwise have been the
case, and there are some countries, of course, that would be
pleased to see the damage wrought on the US by a dollar crisis.
The rest of the world are the
US' creditors and therefore have a lot of power. The rest of
the world hold a lot of US dollars and US dollar denominated
assets, and might just decide to sell them, fast. This is, I
believe, a potent factor that will greatly exacerbate the dollar's
decline and lead to a much more serious dollar crisis.
Clive Maund
Clive.Maund@t-online.de
Clive
Maund is an English technical analyst, holding a diploma from
the Society of Technical Analysts, Cambridge and living
in southern Bavaria, Germany.
Visit his subscription website at clivemaund.com.[You can subscribe
here].
No responsibility can be accepted for losses that may result
as a consequence of trading on the basis of this analysis.
Copyright
© 2003-2004 CliveMaund. All Rights Reserved.
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Inc Miami USA
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