US Dollar in Need of a Tourniquet

OK, front and center this morning, gold has soared to another all-time high! When I turned on the screen this morning, gold was flashing a great big $1,055 figure… WOW! But wait! Gold – and silver for that matter – aren’t the only risk assets moving higher… All 16 of the countries that are deemed to be the biggest US trading partners have currencies that are taking liberties versus the dollar, this morning.

It’s like this, folks… We keep seeing signs that a global recovery is taking place, I mean, the Reserve Bank of Australia (RBA) even hiked rates this week, for crying out loud! And… With those signs of recovery come the feelings that global rates will be rising, as witnessed by the RBA this week, and with global rates rising, the yield differential to the dollar becomes even greater in favor of the non-dollar currencies.

This is quite evident, when you look out on the currency landscape and see that Aussie dollars (AUD) are trading with a 90-cent handle… Brazilian reals (BRL) are trading 36% higher versus the dollar since March 1st!

Why did I highlight those two currencies? Well, as it has been well documented, the RBA already hiked rates and increased their rate differential to the dollar this week, with the thought that they would come back again in November for another rate hike… And Brazil? Yesterday, I saw a story flash across the screen that the Brazilian central bank Governor is mentioning at least 200 BPS of rate hikes before he leaves office next year! Talk about increasing the rate/yield differential!

Yesterday, I talked to you about the euro (EUR), and explained why it had not participated with the other currencies’ assault on the dollar… Well, the Big Dog/euro got off the porch to stretch its legs and chased the dollar down the street a bit, last night… It’s now trading with an eye toward 1.48…

Well, in keeping with the theme that a global recovery is taking place, German Industrial Production rose in August 1.7% from a decline in July. As reported here about a month ago, Germany exited their recession in the second quarter, posting a positive, albeit negligible, GDP… I expect their third quarter to be a bit stronger, as they build on this nascent recovery.

The European Central Bank (ECB) meets this morning, and I don’t expect them to move rates, announce any quantitative easing, or anything like that… What I’m half expecting though is for ECB President, Trichet, to attempt to put a tourniquet around the dollar, to stop the bleeding… Hey! Nobody in the US is fighting to keep the dollar strong, so somebody has to!

The ECB and Trichet know all too well that the US has painted itself into a corner, and the dollar is getting punished for their actions… They also understand that all they’d have to do would be to talk glowingly about the euro, and it would deep six the dollar in a heartbeat! But what good would that do? It’s far better to just keep the lips zipped shut, and watch a general, slow, depreciation of the dollar… So… The euro’s run to the high 1.47 handle this morning could be at risk to what Trichet has to say… But remember, folks, he’s just wrapping a tourniquet around the dollar; it’s not like he’s in love with the dollar and the fundamentals behind it!

Last night, I was doing some research and came across a story that really piqued my interest… Here’s a snippet from the Bloomberg…

“Central banks are diversifying away from the dollar ‘more aggressively,’ according to Barclays Plc, the world’s third-largest currency trader.

“The dollar accounted for 37 percent of the $115 billion foreign reserves central banks amassed in the second quarter, after adjustment for exchange-rate changes during the period, compared with 52 percent in the euro, according to a Barclays analysis of data that the International Monetary Fund released on Sept. 30. That was the first time that the dollar’s share fell below 40 percent in the new accumulated foreign reserves of $100 billion or more since the euro’s 1999 debut.”

Remember, about a week or so ago, when I told you that the IMF’s currency report basically showed a move away from the dollar, too…


OH! And then there was this quote from Canada’s Finance Minister, Flaherty… “We are all concerned about the US dollar”.

And then there was US Treasury Secretary, Tim Geithner… The man who was in charge of the NY Fed, and who oversaw the banks in that region – of which, most of them needed TARP money… Anyway… The thing I want to talk about is his latest statement about the dollar… “Officials recognize that the dollar’s important role in the system conveys special burdens and responsibilities on us, and we are going to do everything necessary to make sure we sustain confidence.”

Yeah, sure you are… How many Treasuries have you auctioned off this year? Something like $1.6 trillion? Now, that will give everyone in the world a warm and fuzzy about the dollar’s future, won’t it? NOT!

OK, I had better go on to something else before I get too wound up!

The Bank of England (BOE) is also meeting this morning… And after an awful set of economic reports in the past month, the BOE members are scratching their heads and wondering what to do next. They cut rates to the bone; they bought toxic assets from financial institutions; they nationalized a few companies that were about to go under; they spent money on stimulus packages… And they implemented quantitative easing…

Sounds like the US, doesn’t it? I’ll tell you whom else it sounds like… It sounds like Japan in the last decade… I hate to be the one to have to tell these dolts that none of this works! It just makes a laughing stock out of your central bank, and puts your currency on the slippery slope downward…

Oh, but not to worry, Tim Geithner is maintaining the confidence in the dollar… (I guess no one told Canada’s Finance Minister, eh?)

Well… Earlier in the Pfennig this morning, I told you about the rise in the Aussie dollar… I didn’t tell you that it was trading at a 14-month high, as it was reported that Australian employment surged 40,600 in September! With a print like this, I think that it’s almost a given now that the RBA comes back in November and hikes rates again!

Another currency at a 14-month high is the New Zealand dollar/kiwi (NZD)… Remember how I’ve told you about the Reserve Bank of New Zealand (RBNZ) Governor Bollard, and his penchant for jawboning kiwi lower? I despise him for these things… As a central banker, your job is to protect the value of your currency, not to diss it!

Well, now Bollard has company… New Zealand Finance Minister, Bill English, has this to say… “We’re uncomfortable with it [kiwi] at this stage in the economic cycle.” You see… Mr. English is concerned that the economic recovery will be stamped out with a strong kiwi. Well, I’ve got a cure for you Mr. English… Tell Bollard and the boys over at the RBNZ not to raise interest rates, and that will do the trick! It’ll stop the speculation in its tracks! However, if the RBNZ does raise rates next month, then you have no one to blame but yourselves!

OK… Let’s get back to gold before we head to the recap!

I did a video yesterday on gold, and I talked about how you can go about your life without an inflation hedge in your back pocket and suffer the consequences of not only having your purchasing power reduced by the falling dollar, but having what dollars you have left eaten away by inflation… OR… you can get that inflation hedge… And put it away for a rainy day… Or pull out to play it like a “Get Out of Jail Free Card” when inflation hits…

To recap… Gold has soared to another all-time high of $1,055 overnight. And the non-dollar currencies are all gaining versus the dollar on the thoughts that a global recovery will result in wider yield differentials in those currencies versus the dollar. Aussie dollar and kiwi have both traded at 14-month highs overnight… And… We could see some downside risk to the euro if ECB President Trichet decides to defend the dollar today after the ECB meeting, this morning.

The Daily Reckoning