FX Update: Dollar Repudiation Now Underway?

Is it here yet?  Maybe, maybe not.  Still, on almost any metric you care to apply, the dollar is sinking fast.

Today:  Silver has now passed $40 and gold is quickly approaching $1,500.  Brent and WTI oil prices have passed $123 and $111, respectively.  The Euro has now solidly run well past expected resistance to $1.44 and even the Canadian Dollar, which has always, always, always been sub par to the USD, usually in the $0.70 to $0.85 range, is now firmly 5 points higher. 

What is significant about this current trend is that it is happening at a time when there are serious structural problems both in Japan and Euroland. 

The widely expected strengthening of the Yen (example) as a result of the earthquake and tsunami, clearly, is not happening.  Apparently, the market now recognizes that the real “fallout” from the crisis is that the only way the Japanese will meet their crushing debt (and, now, rebuilding) obligations in the face of falling GDP will be to massively print more money.  Perhaps the early interventions were too successful?

And, Europe, we should understand, is still a huge mess.  Portugal and Ireland are both begging for bailout money.  There have been no real improvements in Greece.  Spain, despite a new wave of protests, continues to assure the markets that they will muddle through somehow.  Still, as the ECB has now begun to proactively raise rates, many wonder just how the marginal PIIGS will survive.  Eventually, there will be limits to how much of the load Germany will agree to carry. 

As serious as the social unrest (aka:  wars and rumors of wars) in the Middle East and North Africa (MENA) continues unabated, rising oil prices are a clear global threat.  But, nowhere is this threat more serious than in Europe itself, which is more acutely dependent on Middle Eastern supplies, not to mention being exposed other associated risks.

The point here, it seems, is that the world is on fire and, in the rush to the exits, it seems that no one is running toward the US Dollar.  Some argue that this is merely a momentum problem….as the dollar sinks, Asian and OPEC nations are simply exchanging their dollars for what appears to be a more stable (and equally liquid) Euro.  Still, it doesn’t help when clowns like George Soros have been planning (not so patiently) for an opportunity to drive the stake into the heart of the US Dollar.  We can be assured that those who are poised to benefit most from a dollar collapse will drive home their advantage.

In the mean time, our Mr. Bernanke, has very little room to manuever.  The recent, and rather lame, attempts to bolster the dollar with the rumored end of QE2, is likely to be nothing more than hot air.  The Fed, after all, is actually monetizing our debt, a problem that isn’t likely to be easily resolved.  In fact, it might be reasonably argued that such a path, once begun, can’t ever really be reversed.  

Here, of course, the looming risk is that a significant (and unavoidable) surge in interest rates will both further damage the still-weakening housing market and exacerbate our deficit problem.  Both of these risks, of course, may be lethal as they will, without question, tend to feed upon one another.  In fact, the weakening of the dollar almost certainly will force the issue.

In the past, I have argued that the “subprime crisis” (and subsequent recession) actually saved the US (well, delayed anyway) a looming dollar collapse that was already in formation.  Rising oil prices (back in 2008)  were largely the result of rising global demand, but it served to trigger a falling dollar (as a function of our import dependency).   Left unabated, it seemed rather likely that the dollar would have fallen off the cliff as a result of this single factor.

Since that time, our economy has shrunk and our public sector spending has exploded…along with our deficit and debt.  It seems likely that we’ve merely jumped from the frying pan and into the fire.

Markets, of course, are dynamic creatures.  There is a certain elasticity to energy demand.  There is a strong likelihood that the resurgent strength in the Euro could falter as the MENA drama escalates and as austerity programs trigger new social unrest.  There are still many “unknown unknowns” waiting in the wings yet. 

Some believe that a deepening of the crisis will, inevitably, reignite “safe haven” demand for dollar assets.  Maybe, maybe not.  That remains to be seen.

Harry Tuttle 




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