China Disses the Dollar

The US may have been on holiday yesterday, but the rest of the world was not. And so, we had some movement in the currencies in the early part of the day, but after the London boys and girls headed to the pubs, there was little to talk about. What movement we did see yesterday morning was weakness in the euro (EUR), which dragged the other currencies down. The headlines were full of stories about how the markets didn’t believe that the European Union’s plan to deal with the debt crisis of the periphery countries would be enough…

However, what a difference a day makes… Today, the main headline on the newswire is: “Euro strengthens amid speculation EU planned to fight debt crisis may succeed.” Hmmm… A look into the details of the story, will tell you that the markets now believe the Eurozone’s leaders will be quicker to increase borrowing costs than the Federal Reserve, which apparently is now more important than the debt crises problem!

Another item pushing the euro higher this morning is another successful auction of debt by Spain. Spain was able to sell 5.5 billion euros worth of short-term bills today, following up yesterday’s 6 billion euro 10-year bond auction… In both cases, the yield narrowed, which is a good indicator of strong demand.

And then on another front, the dollar is having to fight off the calls that China was “dissing the dollar” yesterday… In my opinion, that’s exactly what China’s Premier, Hu, was doing… It was like the children’s book, Horton Hears A Who… This time it was “The dollar hears a Hu”! HAHAHA! Basically, this is just another step for the Chinese, folks… They have to begin this verbal assault on the dollar’s ability to be the world’s reserve currency, and build a portfolio, if you will, of reasons why they feel that way, so one day, in the future, when the renminbi (CNY) is ready, they can bring out all these reasons, and make a case for their currency to dethrone the dollar. For those of you who did not see or hear what Mr. Hu had to say… Check this out, from the AP

“The current international currency system is the PRODUCT OF THE PAST” Hu said in a written response to questions posed by writers ahead of his meeting with the US President today. Highlighting the dollar’s importance to global trade, Hu implicitly criticized the Fed’s recent decision to pump $600 billion (QE2) into the US economy, a move criticized as weakening the dollar at the expense of other countries’ exports. Hu, went on to say, “The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level.”

OK, Mr. Hu, file that one away… You win that round, because you are bang on!

Speaking of China… I heard an interview with our friend, Jim Rogers, the other day… For those of you who don’t know who Jim Rogers is, you should go to the Internet and read all about this amazing person… He’s one of the few people, that long ago, pointed out the rising deficits in the US. Anyway, Jim Rogers told the interviewer that his daughters are learning Mandarin Chinese…and he thought every child should learn it… Why? Well… Here’s a story I found on the Bloomie yesterday that should shed some light on this…

Driven by its huge trade surplus and strengthening currency, China is moving quietly but swiftly to increase investment in US Manufacturing and real estate. The US is second only to Australia (where they get the majority of their raw materials) as a destination for Chinese investment… Uh-Oh…

So… As I look over the landscape of the currencies this morning (and, mind you, I don’t have my usual screens), the dollar looks weaker than it was last week at this time, with the euro back to 1.34, and the Aussie dollar (AUD) nearing parity again. Shoot Rudy, even gold has found a bid this morning, and is up versus the dollar! It’s been a tough row to hoe for gold and silver at the start of this year, but I truly believe that this will only prove to be a short-term dip that will eventually give those who took advantage of the dip, a reason to shout with joy!

I don’t always get a chance to actually sit down, and read in full, my friend, John Mauldin’s weekly email. I do look for things each week, but to actually sit down, and soak it in, is a rarity for me these days… Well, yesterday was one of those days. Now, John and I don’t always agree on things, especially regarding the plight of the euro, but we do agree on plenty others when it comes to fundamentals, and the economy. Last week’s letter had a great piece in it about the recent interview of Fed Chairman, Big Ben Bernanke… The interviewer’s name is Liesman, and I’ll pick up a portion of John’s letter, right here with a piece of that interview, which is followed by comments by John…

“Then a funny thing happened on the way to QE2: long-term rates began to rise all over the developed world. As Yogi Berra noted, “In theory, there is no difference between theory and practice, there is.” It’s got to be driving Fed types nuts to see the theory of QE, so lovingly advanced and believed in by so many economists, to be relegated to the trash heap, along with so many other economic theories (like that of efficient markets). The market has a way of doing that…”

So Liesman asked Bernanke about one minute into the interview about the little snafu that, following QE2, both interest rates and commodity prices have risen. How can that be a success? Ben’s answer?

“We have seen the stock market go up and the small-cap indexes go up even more.”

Really? Is it the third mandate of the Fed now to foster a rising stock market? I wonder what the Fed’s target for the S&P is for the end of the year? That…would be an interesting bit of information. Are we going to target asset classes?

Understand, I’m not against a rising stock market. But that is not the purview of the Fed. And certainly not a reason to add $600 billion to the balance sheet of the Fed when we clearly do not understand the consequences. If it looks like the Fed is making up the rules as they go along, it’s because they are.

Thanks to my friend, John Mauldin, for that piece and his comments, which play along well with what I’ve written about for some time, regarding what the Fed/ Cartel/Bernanke is doing, and the consequences, as I see them, of quantitative easing…

OK… Back to the currencies… Well, I looked at the dollar index this morning, just to see where it was, and I noticed that it was 78.85… Now… I’m not a huge follower of the dollar index, as it stands, but…a lot of markets people use it as their tool to determine the strength of the dollar… Well folks, we could be at a crossroads, and the dollar may be sinking down… The dollar index has fallen to this level of 78.85 three times since the end of November… Could this be the time it continues through this level, and brings a ton of markets people that want to sell the dollar, but are waiting for a sign of real conviction, into the arena to sell? Could be, folks… Or… It could bounce off this level like it has three previous times… The thing you have to do is make a decision, and stick with it… The choice is up to you, but we’re here at the crossroads… What are you going to do?

It’s almost like you could have predicted this move higher by the Chinese renminbi, but here it is, ahead of the talks between the leaders of China and the US getting stronger versus the dollar… Once again, overnight, the renminbi reached a 17-year high versus the dollar… You now have to wonder if when the dust settles on the high level meetings, and Mr. Hu returns home, will the renminbi back off these lofty levels? Probably, but not by much, as the overall underlying trend of the renminbi is stronger.

Last Friday’s economic data here in the US was interesting, as retail sales were up… But not as strong as forecast which, if you go back to Friday’s Pfennig, was my call for the data… The media got all lathered up about it… But really? Is a result that’s not as good as forecast reason to get all lathered up? Really? Hmmm…

Then there was this… Well… The CFTC (Commodities Futures Trading Commission) – which was supposed to be our Knight in Shining armor – turned out to be the stable boy… Recall, I had told you that my hopes were that the CFTC would call attention to the perpetrators of the precious metals price manipulation, and institute position limits that would be in line with what would be acceptable and reasonable, and not allow the kind of shorting to keep prices from gaining. I was singing, “Don’t let me down… Don’t let me down…” But the CFTC let us all down! The CFTC did propose trading limits, but not to the degree of what I or anyone else that follows this stuff, would deem reasonable! They wimped out on us, folks… It’s that simple…

To recap… The currencies sold yesterday, but rebounded overnight, and are now sitting at their strongest levels versus the dollar in weeks! China’s President, Hu, delivered some sharp-tongued remarks directed at the dollar, and the Fed Reserve yesterday, ahead of his meeting with the US president today. Retail sales in the US were not as strong as forecast on Friday, and John Mauldin lends us some thoughts on the Fed, Bernanke, and QE2…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning