Macro Economics
U.S. Dollar the New Gold?

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By washcomp
February 5, 2010

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Disclaimer: I am not a financial adviser, so the following is just one guy's opinion :-)

The major problem with the dollar index, as has been pointed out is the Euro and the Yen. A few years ago, the Euro was considered an alternative to the buck, but the Euro is a common currency connecting countries with very different economies. The countries suffering most have four possible outcomes:

1) Cut spending dramatically and join the third world (from an economic standpoint) for a number of years. This is "distasteful" to their population and their politicians will have a hard time force feeding this solution.

2) Bailing out the "poor" members. This is difficult to sell to the other countries as they feel they are pouring their own money into spendthrifts and resent it.

3) Spinning off countries from the Euro, back into their native currencies which would reduce the efficacy of the Euro as a currency.

4) Maintaining the status quo which could eventually tear things apart.

None of these are good outcomes. Other currencies such as the Swiss Franc (on the strong side) and some of the Eastern European (which are weaker) are tied closely to the Euro (rather than the dollar) because of trade considerations and actually might be benefiting by a drop from a domestic standpoint.

While the Yen has remained strong, there are few who would bet on the financial stability of the Japanese economy because of their expensive social safety net and their shifting demographics.

The British pound is tied to an economy which was saved from disaster by North Sea oil. But that oil is running out, and with the increase of the USD becomes a less valuable asset for the remainder. Additionally, they have wrecked their economy to the extent that the GBP is no longer a major currency competitor.

The Chinese have pegged their RMB to the greenback. As the dollar rises, the pounding on the drum for them to raise the value of their currency has less meaning because, in fact, it has risen against most of the remainder of the world's currencies (along with the dollar). It becomes more of a domestic US mission and frankly, we have reduced leverage as they are one of our major creditors. The option of our buying back our debt from them (to free ourselves) is not realistic, nor is defaulting on our debt, so it is what it is.

The Australian dollar is dependent on Chinese infrastructure and manufacturing spending and with the recent announcements of stimulus cutbacks in China has received a pounding.

The Canadian dollar is probably an interesting play because it follows the greenback, but the country is in far better economic condition. They should do fine in the long run.

The US dollar has, for all intents and purposes, taken the place of gold in the international financial scheme. When other currencies become stressed, the dollar benefits and rises in price. Gold pricing will not be a factor unless the dollar is obviously stressed by inflation. I expect that to happen sometime in the future (probably a few years) and until that time, gold will not do particularly well as a proxy for real money (which the world markets currently interpret as the USD).

Long story made short, until/unless the dollar cracks, commodity alternatives (gold included) will do poorly. Just as in fashion they might say that white is the new black, in our global economy, the US dollar is the new gold (for now at least). Try your best not to bet against the Fed in this game because they have a lot more chips than you have and you can run out of chips waiting for them to get dealt a losing hand.

The equity market is not a reflection of the economy. We, on METAR are well aware of the factors in play, yet some of us frequently take the same train as others in the belief that "this time it's different". It's not. A penny saved is a penny earned.

As I have said many times in the past, there are two tells to read what to do:

1) The US dollar index
2) The employment figures in the US

You can follow my advice or not (frequently I don't and regret it :-(), as they are your chips to play. All I ask is that you seriously consider it.