U.S. Dollar: Cliff Diving Again

Is this an unorderly decline for the dollar?

These last two days have been bad for the dollar. We are seeing heavy losses against the Swiss Franc, the Euro, the Australian Dollar, and The Japanese Yen. (The Pound is going down even more).

After Bernanke lowered rates to effectively zero and said he was starting up the helicopters, currency traders decided the U.S. Dollar is a weak currency.

Take a look at these two charts. The Top one is from today and the bottom one is the one I posted yesterday. Not good.

currencies-2008-12-17

currencies-2008-12-161

1 Comment
  1. John Creighton says

    It seems to me that predicting the collapse of the dollar is a difficult prospect as their seems to be far to much manipulation of the economy and lack of transparency from the federal reserve.

    “Some critics believe the Fed exacerbated this idea when it decided to stop publishing the M3 aggregate of financial data, which details the total amount of money in circulation at a time. Some of them argue that it is a way the Fed could hide an impending economic disaster from the public if it felt the need.[126] The Fed said that economists did not need M3 when they had M2, despite the fact that the M3 was the only aggregate to contain information regarding the most extravagant monetary exchanges, and therefore would be needed to have a complete understanding of the overall monetary policy in the United States.[88]”
    http://en.wikipedia.org/wiki/Federal_Reserve#Opacity

    The question is if the US currency falls what will it fall against? As I mentioned in a previous post, the wold is dependent upon selling goods to The United States. I’m left to wonder if any weakening of the Untied States currency would have a ripple effect and weaken the other currencies with it. Commodities are week as a consequence of the credit crisis. The only time tested measure of value according to many sources is gold. Thus if a currency weakens shouldn’t gold rise? Shouldn’t we be able to measure a devaluation of the US dollar by the rise in the price of gold. Shouldn’t we be able to see people moving to gold as a hedge inflation in response to the federal reserves policy of quantitative easing?

    Given the contraction of money supply and the obligation to repay debt the dollar is still in high demand but we should question as to weather there is not another reason. There have been allegations on numerous sites that the central banks have been manipulating the price of gold in order to maintain the strength of their currency while inflating the money supply:

    “Why would anyone want to suppress the price of gold?

    1) Suppressing the price of gold has made it a cheap source of capital for New York bullion banks, which borrow it for as little as 1 percent of its value per year. Gold is borrowed from central banks and sold, and the proceeds are invested in the financial markets in securities that have much greater rates of return. As long as the price of gold remains low, this “gold carry trade” is a financial bonanza to a privileged few at the expense of the many, including the gold-producing countries, most of which are poor. If the price of gold was allowed to rise, the effective interest rate on gold loans would become prohibitive. 2) Suppressing the price of gold gives a false impression of the U.S. dollar’s strength as an international reserve asset and a false reading of inflation in the United States”
    http://www.lemetropolecafe.com/campaign.html

    Also See:
    http://www.zealllc.com/2001/gcarry.htm
    http://seekingalpha.com/article/94111-gold-futures-dirty-secret-part-ii

    Assuming the allegations are true how long can the price of gold be suppressed though either the gradual loaning and selling of more gold by central banks plus along with “creative banking” practices:

    “Too much gold is being consumed at too cheap a price. Massive amounts of derivatives are being used to suppress the gold price. If this situation is not corrected soon, there will be a gold derivative credit and default crisis of epic proportions that will threaten the solvency of the largest international banks and the world standing of the dollar. ”
    http://www.lemetropolecafe.com/campaign.html

    I don’t think any of the information is from credible sites so I’m slightly skeptical at this moment but the gold carry would explain the treasury bubble. I think I may try to look to see if I can find out how exposed banks may be to gold liabilities in the event of a dollar collapse. If I was going to try and make money on this I’d play the spread between gold and treasuries or I’d try to hedge any risky exposure a finical institution might have to gold liabilities with gold futures. However, if the amount of gold demanded truely exceeds the supply (fractional gold banking) then in the event of a collapse due to this market manipulation would you truely be able to get the gold which you are owe in the futures market. Additionally, if the federal reserve is truely involved in market manipulation is it possible to outsmart them when they have all the information and power.

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