-- Posted Thursday, 26 March 2009 | | Source: GoldSeek.com
By Peter A. Grant
Mar 26 a.m. (USAGOLD) -- When the Fed announced it would begin quantitative easing after last-week's FOMC meeting, not surprisingly the dollar plunged rather dramatically. Confirmation that the world's largest economy and debtor nation would print dollars and use those monies to buy its own debt was an extremely dollar negative event.
Over a third of the yearlong rally in the dollar index from the record low at 70.70 (Mar-08) to the early-March high at 89.62 has already been retraced. Short term potential is back toward 80.16/00. A break of this level would shift focus to the Dec-08 low and an important retracement level at 77.93/69. Below that, the all-time low in the dollar index would be back in play.
Just to give some perspective, the dollar has been -- and remains -- in a long-term downtrend. The past year's rally stalled shy of the 38.2% retracement level of the leg down from the Jul-01 peak at 120.93 to 70.70.
The previous sustained dollar rally occurred in 2005 as US interest rates rebounded from extremely low post-9/11 levels. The high point for the dollar index in Nov-05 was 92.53. That level has been left well protected
Going further back, when then Fed Chairman Paul Volcker aggressively raised interest rates in the early-1980s in an effort to stem rampant inflation, the FRB dollar index reached a high of 141.86. Be aware that the FRB dollar index is a legacy data series, so it is not an apples-to-apples comparison.
Nonetheless, it is clear that at this point, the recent dollar rally has been nothing more than a correction within the long-term downtrend. That primary trend seems to be re-exerting itself.
In my last commentary, I categorized the Fed's move to debt monetization as the nuclear option. Once you've lowered the target for Fed funds to 0% and rates at the long-end of the yield curve refuse to come down, you're out of options, you print money and buy Treasuries.
We've also discussed at length the growing risk of competitive currency devaluation. Certainly, quantitative easing here in the US and elsewhere in the world is part of that concern. What other "non-standard" measures might be employed if rate cuts and quantitative easing fail to revive global economies?
It was the early success of quantitative easing in the UK that prompted the US to follow-suit. However, after just two weeks, a failed gilt auction -- where demand was less than supply -- has raised serious concerns.
George Osborne, the UK's shadow Chancellor, said: "The failed gilt auction, the first for many years, should be of real concern to everyone. It is too early to say, but the risk is that at some point the Government will not be able to fund its huge debts."
The simple solution, and therefore the likely one, is that the BoE prints more pounds and uses those monies to bring demand up to the level of gilts offered. Similarly, one might expect that the Fed would view waning interest in Treasuries -- in the face of growing funding needs -- as a license for further monetary expansion.
The Swiss National Bank (SNB) and Hong Kong Monetary Authority (HKMA) have already engaged in direct intervention in the FX market to knock down their currencies. This might be the next option for the US, UK and Japan if ongoing debt monetization fails to get the desired results.
Adding another layer to the vulnerability of the dollar are calls for a new global reserve currency. China, Russia Brazil and India have been championing this cause and it seems to be gaining some traction. Perhaps even here in the US.
On Wednesday Treasury Secretary Geithner said that he was "quite open" to the Chinese plan for a global reserve currency linked to IMF Special Drawing Rights (SDR). In saying that, Mr. Geithner essentially signaled a willingness to cede substantial US economic influence and power.
In hindsight, he confessed that he hadn't even read the Chinese plan. Of Geithner's comment and subsequent revelation, Jessica Hoversen, a foreign-exchange analyst at MF Global said, "Government policy is only as effective as the government is credible. Having a government official speak out of both sides of his mouth in five minutes erodes credibility."
Reserve diversification, out of dollars and into other currencies and gold, has been a growing trend for some time now. Events of the past several weeks are only going to accelerate that diversification and the ultimate selling of dollars.
Next week's G20 meeting has been deemed a "make or break event" for global market. I would also contend that if the G20 takes up the call for a "super sovereign reserve currency" with any seriousness, it is simply a "break event" for the dollar."
Such a move will prompt holders of dollars to start paring back exposure dramatically, likely leading to a resumption of the long-term downtrend in the greenback. That could spark considerable interest in gold, not just as an alternative reserve holding, but also as a hedge against a falling dollar and the inflation that is likely to result.
Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.
-- Posted Thursday, 26 March 2009 | Digg This Article
| Source: GoldSeek.com
