The Dollar's Next Move

After piddling about for the last two days, markets might actually take a significant direction in the next 48 hours. And par for the course in 2009, Washington will be crackin’ the whip:

First, the Federal Open Market Committee will reveal their latest interest rate decision today. Chances are they won’t even hint at raising rates for the foreseeable future, but the Street is in knots over whether they will extend quantitative easing plans. We care, but only a little… the damage has been done. More on that in a second.

Then after the Fed, we should start hearing whispers from the G-20 meeting in Pittsburg, which officially starts tomorrow. With world leaders mostly convinced the recovery is under way, we suspect talks of reform, regulation and exit strategies. Namely, they’ll be wondering what the hell to do about this:

Dollar Decline

The dollar — the money every G-20 nation holds in reserve — has quietly become little more than a carry trade currency. It’s lent at one of the lowest rates in the world. The biggest financial bailouts in modern history have made prospects for dollar inflation pretty high, to say the least. And with every day of this “recovery,” it’s worse.

More QE from the Fed or dollar reserve jitters from the G-20 should mark the next move for the dollar… we’ll keep an eye on it for you.

“The fact that the dollar has been the reserve currency of the world has allowed us to live beyond our means for a long enough period of time to get into trouble,” our executive publisher Addison Wiggin told the Pittsburg Post Gazette yesterday. “That’s what the crisis is. The deficit spending in Washington is the biggest threat to the dollar’s status as the reserve currency.”

“Most of our spending is financed through the credit market, which is heavily dependent on our ability to attract capital from the rest of the world. That ability is in serious jeopardy.”

“The popular explanation for dollar weakness is that investors have a fresh appetite for risk,” Chris Mayer adds. “But maybe there is more to it than that. As one analyst said, if the dollar is the new yen, ‘The greenback is in real danger.’ That’s because foreigners hold a lot of dollar assets, and selling them to swap into higher-yielding currencies could continue to keep fresh pressure on the dollar.

“This loss of purchasing power is like a subtle tax and eats away at your wealth. That’s why I’m bullish on gold and oil and other real assets. As the dollar weakens, these assets ought to reprice and hold their own.”