US Dollar Gains Huge Chunks of Ground

Gold has picked up the pieces of its drop, and is rallying this morning, with it up right now: $34… As I walked by Aaron’s desk on Friday, he stopped me to show me a video of a news reporter saying something like… Investors should not buy gold, but should instead hold dollars, because…dollars are backed by the US government, and gold is backed by nothing…

I wanted to reach into his computer, grab the reporter by the neck and shake him! Why would he be spewing such garbage? Sure the dollar is backed by the government…but isn’t that same government that has done just about everything it can do to weaken the dollar, and reduce holders of dollars’ purchasing power? And takes every opportunity it can to point out that the Chinese currency needs to appreciate versus the dollar? So, what good is it to have a government backing a currency if in essence they don’t back it at all? They instead opt to make one bad choice after another that causes the dollar to weaken more every year?

And gold… Let’s see… Sure no country backs gold… THAT’S WHAT MAKES IT SO DARN VALUABLE! No government making bad choices… No government laying claim to it… No government affixing their liabilities to it… Sure we all, here in America, need to have dollars for gas, groceries and giggles… But beyond that… Give me gold!

I talked about this in my radio interview yesterday… So, for anyone who listened in, this is a repeat tirade!

But that’s about as far as I can go with regards to assets rallying versus the dollar, this morning. The dollar is in the drivers’ seat, and the currencies don’t look good… Japanese yen and Chinese renminbi (CNY) have eked out small gains versus the dollar this morning, but they are very small…

European finance ministers are meeting in Luxembourg today, but this time they aren’t meeting to toss around the ideas for a hoola-hoop for the Eurozone debt problems… In the past, the idea that they were meeting to discuss ideas would underpin the euro (EUR), and thus the remainder currencies… But this meeting isn’t about “ideas” to solve the problem… This meeting is about weighing the threat of a Greek default. And to discuss whether or not Greece has done enough to qualify for another tranche of bailout funds…

But, the euro has to feel as though it’s getting hit on both sides now, because not only does it have these debt problems beating on it daily… But now, the Eurozone economic data is beginning to show signs of a major slowdown, even recession. In fact, even Germany is beginning to feel the pinch, and that’s not a good thing for the euro, for Germany has been the shining light that has underpinned the euro while the debt plagued countries of Portugal, Ireland, Italy, Greece and Spain, remain in the news daily. The PIIGS as the markets call them.. and all this bailing out of the PIIGS reminds me of the saying I used to say long before Sarah Palin borrowed it… You can put lipstick on a pig, but…it’s still a pig…

All things being equal, and if we don’t see a Greek default this week, we could very well see a direction cut out for the euro this Thursday, when the European Central Bank (ECB) meets to discuss rates… The markets are of the thought that the ECB will cut rates, to promote growth, and thus add to the problems for the euro this morning… But… If you think like me, (and may your lord protect you if you do!) you’ll be of the opinion that the ECB will NOT cut rates this Thursday, given the latest inflation reports which had inflation in the Eurozone at 3%, well above the ECB’s target rate of 2%. And, so it could be, that once the ECB leaves rates unchanged, that all the sell orders that are in ahead of what they thought would be a rate cut, could very well be reversed, and support for the beleaguered euro would come… Maybe, just maybe…

So… The currencies like the Aussie dollar (AUD), kiwi (NZD), Canadian dollar/loonie (CAD), and others, are trading at 2011 lows… That’s right… All the great moves we saw in these currencies during 2011 have been erased, and we’re back to 2010 levels… Hmmm… Well… I guess all those people that for years have said they were finally going to buy gold and currencies to diversify their investment portfolio, can now load up at these bargain prices! Hey… There’s always a good time to buy at bargain prices, eh? So, that holds true for investors that have already diversified their investment portfolio with currencies and metals… It’s a bargain price for them too!

You know… The countries of Switzerland and Japan are to blame for a lot of this dollar strength (shoot, even Brazil qualifies here)… Investors were flocking to alternative currencies other than the dollar… But those countries intervened to prevent their base currency from appreciating versus the dollar. So, by de-facto default, investors went back to dollars, which as the reserve currency of the world, remains the most liquid currency…

But what happens when things go to hell in a hand basket with the US economy? Ahhh grasshopper, we’re about to find out… Soon…

On Friday, we saw the color of the latest Personal Spending and Income reports… Spending rose in August, and income fell… Not a good combination there. Wages fell -0.1% in August, reversing the 0.1% increase in July… Look… Wages here in the US have gone nowhere for almost a decade now, but have really fallen out of bed this year, and is another reason the US recession continues…

Wages are falling… Unemployment keeps climbing… But… People surveyed by the U. of Michigan are confident… Go figure…

Today, we’ll see the ISM Manufacturing Index, which is hanging by the skin of its teeth to the 50 level which is the line in the sand that decides if manufacturing is contracting or expanding… Once the index falls below 50, you can figure that the US economy is stuck in the mud… Now, we all know it is already, but some people need to see things like the ISM falling below 50 to prove it to them.

This will be a HUGE data risk week across the board. I already told you about the ECB meeting on Thursday… And here in the US we get today’s ISM, tomorrow, Factory Orders, and Big Ben speaking on the economy, and probably explaining his comment last week that the US unemployment problem was a “national crisis”. And then on Friday, the Jobs Jamboree will print, and it will be ugly, folks… That’s my prognostication for the Jobs Jamboree… And then there will be lots of smaller data prints sprinkled throughout the week…

In Canada this week, they too will print their Manufacturing Index report (PMI) and if I’ve added up the positive data prints correctly for the past month, I would say that Canadian PMI will remain well above the 50 level… Thus illustrating the tale of two countries…

I know this will sound a little harsh toward the Greeks… But… Every time I see them rioting because they are having to pay their debts, it just really bothers me… Yes, that’s over there, and away from here, but… That’s where I say, just because it’s over there, doesn’t mean it can’t happen here, when one day we are told that we have to pay back our debts… Debt, whether it’s in Greece or the US is debt… You can rearrange the deck chairs on the Titanic all you want; the debt has to be repaid… Someday…

And before I head to the Big Finish… I see where US lawmakers are once again considering a bill that would pressure China to allow a faster appreciation of the renminbi versus the dollar (here they go again, wanting the dollar to be weaker; if it were me, I would pass on that kind of backing!)… Look, folks… I’ve said this quite a few times in the past… But there’s always going to be a country that can make stuff cheaper, if given the capital to do so… So, if you make China’s currency more expensive, there’ll be another country to produce things cheaper… I think you’re playing with fire when you are messing with the Chinese, who have financed our debt for the past decade now.

Then there was this… From CNN Money…

Economists are convinced the euro will survive as a currency without losing any members…not even Greece.

Of the 22 economists surveyed by CNN Money, 17 are predicting that the euro will hold together, even though almost all of them believe Greece will default on its debt by the end of next year. Default speculation has led to fears that the Eurozone will break apart. But economists say the barriers to exiting the euro are too significant to make it a viable option, even with a looming default.

“The benefit of leaving the Eurozone is simply not strong enough for a country to leave,” said Russell Price, senior economist for Ameriprise Financial.

A Greek default is 93% priced in… That’s up from 91% a few weeks ago… I don’t see how defaulting and not leaving the euro helps the Greeks. Leave the euro, go back to the Drachma devalue the currency to the bone, pay back your debts, and begin to build a strong foundation without debt, so that one day you can rejoin the euro… I know that all sounds easy here… And it won’t be, for sure… But I don’t see how defaulting but remaining in the euro helps Greece… At the same time, I don’t see Greece leaving the euro as a “garden trip”… So, it will be painful, but no pain, no gain… And of course that’s all easy for me to say, as I sit here eating my chocolate bonbons, and watching TV! HA!

To recap… The currencies are sliding further this morning, led by the euro, with only the Chinese renminbi and Japanese yen eking out gains versus the dollar. Gold, however, is stronger by $34 this morning, and is beginning to look like it has left its brief dip below $1,600 in the rearview mirror. There is lots of data risk this week in the US, Canada, and Eurozone, with the Big Jobs Jamboree at the end of the week.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning