Rome is burning

So says the subject line of the latest missive from DR Australia editor Dan Denning, which greeted us in our inbox before the first slug of Monday morning coffee.  But this was plenty to wake us up:

I strongly urge you to take a look at this chart. It's from the Fed. It shows the Fed's trade-weighted dollar hitting an all-time low since the index was established in 1971:
Here we are at an all-time low on the dollar. All time.
Is it a buy then?
Well, what possible argument could you make for buying the dollar right now? That interest rates are going to rise to double digits again, like they did after the 1982 recession?
Wait, I thought we were talking about the Fed cutting rates. How will the dollar if the Fed cuts rates? Oh, you mean it won't?
Can you imagine what would happen to those 2 million ARMs set to reset in the next two years if the Fed hiked rates?
No…the Fed won't be raising rates. So where does the dollar go from here? Here's what traders are telling Bloomberg about the dollar and Treasury bonds:
"The only component we can be confident about as nations diversify currency reserves is that Treasuries will be sold," said Sean Callow at Westpac Banking here in Australia.
China will "reduce its holdings of dollar assets to get higher returns," says Ha Jiming, the chief economist at Beijing International Capital Corp.
I like what Masayuki Yoshiara said. He manages $25.9 billion for Sumitomo Life in Japan.
"We're not so bullish on the dollar."
Me either.
And when you look at that chart and consider the Fed will probably cut rates in the next ten days…it makes you wonder if gold isn't about to go to $1,000 in the next eight weeks.

Pardon the interruption, but a forecast like that and a deadline like this make today a darn good time to take out a "Wealth Insurance" policy.  Now back to you, Dan:

I guess the other question you could ask is when and why would you buy the dollar. For yield? For safety? For old time's sake?
It's pretty obvious the Fed is going to let the dollar collapse to prevent major recessionary pain from the housing market in the U.S. But the dollar's decline is moving holders of Treasury Debt to the exit with alacrity.
From Wes Goodman and Daniel Kruger in Bloomberg:
"Two year Treasuries returned 1.09 percent in August, the best monthly performance since 2003, according to indexes compiled by Merrill Lynch and Co. At the same time, holdings of U.S. bonds by governments and central banks at the Federal Reserve fell by 3.8%, the steepest decline since 1992.
"The dollar's slump to a 15-year low against six of its most actively traded peers is turning the gains into losses for international bondholders, prompting China, Japan, and Taiwan to sell . Overseas investors own more than half of the $4.4 trillion in the marketable U.S. government debt outstanding, up from a third in 2001, according to data compiled by the Treasury Department.
Treasuries are only a flight to safety if you it doesn't cost you your capital. It's all well and good that the U.S. enjoys a yield differential with Japan. But if the currency means the real real return is a loss…the yield is rather inadequate.
Bernanke is Nero.
Rome is burning.
Dan's kept up quite a correspondence with us lately, igniting some lively exchanges with our US-based editors.  For a glimpse, check out the Rude Awakening from Friday and today.