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Will the US Treasury Defend the US-Dollar?Gary Dorsch “Everything depends on proper listening. Of ten people who listen to the same speech or story, each person may well understand it differently. Perhaps, only one of them will understand it correctly.” How should traders interpret the latest remarks by US Treasury chief Timothy Geithner, who shocked the currency markets on October 18th, citing his determination to defend the value of the US-dollar? Geithner was asked in a question and answer forum, “Are you concerned with all of the money being printed over the last couple of years? Are we on our way to debasing the value of the dollar? Geithner surprised his audience with a passionate defense of the US-dollar. “Not going to happen in this country. It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity and competitiveness,” he said. “It is not a viable feasible strategy and we will not engage in it. It is very important that people have confidence in our capacity to meet our long-term fiscal obligations, to make sure the Federal Reserve does its job of keeping inflation low and safe over time. And we recognize that the US plays a particularly important special role in the international financial system, because the US-dollar serves as the principal reserve asset of the global financial system. So we’re going to work very hard to make sure that we preserve confidence in the strong dollar,” Geithner declared. Yet just a few days earlier, during a much-anticipated speech on October 15th, Fed chief Ben “Bubbles” Bernanke broadly hinted that he favored an early resumption of “quantitative easing” (QE-2), knocking the US-dollar into a tailspin. “Inflation is running at rates that are too low relative to the levels that the Committee judges to be most consistent with the Fed’s dual mandate in the longer run. There would appear, all things being equal, to be a case for further action,” Bernanke declared. Bernanke took the highly unusual step of making it clear that the Fed’s policy going forward would be to raise the rate of inflation to 2% by means of massive money printing. Bernanke tried to brainwash the American public into believing that QE-2 will significantly bring down the jobless rate. Bernanke’s support for QE-2 helped the Dow Jones Industrials index to soar above 11,100, despite further losses in US-payrolls, and a jump in the under-employment (U-6) jobless rate to 17.1%.
Bernanke knew that simply hinting at QE-2 would spark a further sell-off of US-dollars. After Bernanke spoke, the Australian dollar reached parity against the US-dollar for the first time since it was freely floated in 1983. The US$ also fell to parity with the Canadian dollar, and hit new all-time lows against the Swiss franc, and a 15-year low against Japan’s yen. Brazil’s real, Chile’s peso, the Korean won, and the Indian rupee rose versus the US-dollar. Gold hit a new record high, and commodities such as crude oil, copper, corn, cotton, cattle, soybeans, platinum, palladium, rubber, and silver all continued their upward spiral. After Geithner’s remarks, the Euro quickly found resistance at $1.400, and began to sink to $1.3935 within a few minutes. The Aussie dollar dropped 0.80-cents to 98.50-cents, before getting blasted again, a few hours later, after China’s central bank shocked the markets, by lifting its one-year loan rate a quarter-point to 5.56%, its first rate hike in 3-years, knocking industrial commodities lower. The Aussie plummeted towards 96.50-cents a few hours later, before regaining its footing. The Euro’s slide came to a halt at $1.3700, where sidelined buyers emerged. However, 24-hours later, the impact of Geithner’s remarks and China’s surprise rate hike, had already dissipated into thin air. The Aussie dollar, - a symbol of risk taking, - rebounded strongly to 98.75-cents, and the Euro recovered to $1.3950. The US-dollar skidded to 81-yen, despite threats by the Bank of Japan a few hours earlier to expand its own version of QE-3, beyond the 5-trillion yen of JGB buying pledged earlier. Once again, traders resumed their betting on “Bubbles” Bernanke, and a massive tidal wave of QE-2, starting after Nov 3rd, that would trump the efforts of other central banks to prevent the US-dollar’s downfall. A few hours later, Geithner stepped-up his verbal rhetoric, by telling the Wall Street Journal, on October 20th, there’s no need for the US-dollar to sink further against the Euro and the yen, saying these currencies are “roughly in alignment” now. He emphasized that the US-Treasury isn’t trying to devalue the US-dollar, echoing comments he made in Palo Alto, California. Geithner appeared to offer a secret gentleman’s agreement with Beijing, to stop the currency war, if the pace of the Chinese yuan’s appreciation against the US-dollar since September is sustained, to correct its undervaluation. “If China knew that if it moved more rapidly, other emerging markets would move with them, it would be easier for them to move.”
Traders can expect greater volatility and turbulence in exchange rates, with the Group-of-20 nations moving towards the brink of a currency and trade war that is being driven by high unemployment in the United States. Faced with slumping domestic demand, the US-Treasury is trying to boost US-exports abroad, by cheapening the value of the US-dollar in relation to other currencies. President Barack Obama is under heavy pressure from leading Democrats, to declare China a currency manipulator, and to agree to stiff tariffs against Chinese imports. The Fed has engineered the devaluation of the US-dollar, by issuing a steady drumbeat of threats to unleash QE-2, upon the world money markets. Bond dealers reckon the Fed could print a minimum of $500-billion in the months ahead, or it might decide to monetize the entire US-budget deficit for this fiscal year, projected at $1.2-trillion. Also greasing the skids under the US-dollar has been the steady slide of US Treasury yields compared to German bund yields. In early September, the US Treasury’s 5-year note yielded +25-basis points more than German 5-year yields. Today, the US-Treasury’s 5-year note yields -53-bps less. The US-dollar’s allure as a “safe haven” currency has also crumbled, as tensions surrounding the Greek bond market continue to subside. Credit default swap (CDS’s) rates, measuring the odds that Athens would default on its debts, have dropped in half over the past four-months, to around 650-basis points today.
The US Treasury has sought to gain extra leverage from the dollar’s slide, by seeking to corral the support of other G-20 central bankers and finance ministers, behind its drive to strong-arm China into more rapidly and sharply rising yuan. With the dollar down 12% against the Japanese yen since mid-June, compared with less than 3% versus the Chinese yuan, sparks began fly. Tokyo denounced Beijing for bidding up the yen by increasing its purchases of Japanese government notes. Since Beijing scrapped a 23-month-old peg to the dollar on June 19th, and said it would let the yuan resume a managed “dirty” float, the yuan has appreciated +2.8% against the US-dollar, but weakened 10% against the Euro. “It is much worse against the Euro than the US-dollar - this is not a good situation. It contributes to global imbalances. We want China to assume its responsibilities as a global player,” said Euro zone finance chief Jean-Claude Juncker. US-lawmakers and President Obama have seized upon America’s widening trade deficit, which reached -$49.7-billion in June 2010, to take aim against the Chinese yuan. Over the last 12-months, the US-trade deficit with China reached $257-billion, and is running 21% above the pace from a year earlier. The deficit with China as a share of America’s balance of payments is now over 40%, compared to just 20% in 2001. Year-to-date imports from China are $229-billion, while exports are only $55.8-billion, leaving the ratio of imports to exports at 4.9. The average for all nations’ imports-to-exports with the United States is a ratio of 1.6. Beijing intervenes regularly in its foreign exchange market to rig the value of the yuan, and it’s acquired a massive $2.65-trillion in FX reserves, while keeping the Chinese yuan undervalued by 40% against the US-dollar, on a trade weighted basis. Democrats and Republicans in the US-Congress aren’t willing to wait for Beijing to revalue the yuan at a snail’s pace over the next several years. In Hong Kong, the 12-month yuan forward contract is trading at 6.4425 /dollar indicating that traders figure that Beijing would only allow the yuan to rise by a paltry +3.2% rise against the dollar over the next 12-months. To read the rest of this article, please click on the hyper-link below: ### Gary Dorsch 321gold Ltd |
