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IT'S ALL ABOUT THE DOLLAR

While America celebrated Thanksgiving, foreign exchange markets behaved in an unruly fashion with the U.S. Dollar Index precipitously dropping to 83.60 – falling out of a range between 85.10 and 85.71 which had held for some four weeks between October 26 and November 21.

The following is a synopsis of the Dollar’s predicament - derived largely from the Privateer's most recent weekly newsletter.

This precipitous drop in the Dollar was conveniently attributed, by the mainstream financial press, as reaction to yet another Chinese monetary official making the case for diversification of sovereign Chinese forex reserves – which had ballooned to $U.S. 1 Trillion on November 6.

"Firstly, long-term interest rates are falling (meaning lower returns on bond investments). Secondly, the exchange rate of the US dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for east Asian reserve assets," Wu said.

Sounds like a credible explanation, doesn’t it?

Other media outlets tried to explain the Dollar’s drop to the “anticipated narrowing” of interest rates between the U.S. and Euroland – with the European Central Bank [ECB] widely expected to raise their benchmark lending rate 3.50% on December 7 when they meet with the Fed, whose FOMC meets one week later, is widely expected to leave rates unchanged.

Still other reasons proffered run the gamut from the cessation of the Yen Carry Trade to thin markets resulting from North American traders being on vacation.

Who’s to argue with any of these reasons – here’s what happened:

Now For The Real Reason

As the Privateer’s editor - Bill Bucker - so eruditely points out,

“The [real] reason why the US Dollar is weak is that it is a fiat currency backed by nothing. True, so is every other currency in the world. But the US, along with having a fiat currency, also has a level of debt - “public” and private - unapproached by any other nation.”

The chart of the 35 year history of the U.S. dollar since President Nixon closed the Gold Window in August of 1971 tells the story:

And Here’s Why It’s Different This Time:

Once again, I’ll defer to the words of Bill Bucker:

The US has had a fiat currency for thirty-five years - since August 1971 when federal government debt was $US 400 Billion. It has been a net international debtor for more than twenty-one years - since March 1985 when federal government debt was just under $US 2 TRILLION. The present Bush Administration, now halfway through its second term, has already amassed nearly HALF of all Federal Government debt borrowed since 1787. But the Bush Administration (and the US Congress) have done more than that. They have also destroyed the reputation of the United States of America in the eyes of the world.

And HERE lies the REAL danger to the US Dollar.

As analysed in this issue and the previous issue of The Privateer (Numbers 565 and 566), US foreign policy is in tatters. The downward spiral of US global influence and clout in the less than three weeks since the mid-term elections on November 7 has been awesome to behold.

It is inevitable that this loss of “clout” and this examination of the ever widening gulf between the words and DEEDS of the US federal government will spill over into the financial system in general and into US markets in particular. We have now seen the start - with the sudden dive of the USDX this week.

In a nutshell folks, for all of the reasons above – this is why Jim Puplava and Financial Sense crew are such ardent advocates of proper asset diversification among ALL asset categories – including foreign currencies, precious metals and resources.

Today’s Market

Overseas equity markets began the week positively with Japan’s Nikkei Index gaining 150 points to 15,885. North American markets didn’t fare as well with the DOW losing 158.38 to 12,121.79, the NASDAQ falling 54.40 to 2,405.90 and the S & P shedding 19.00 to end the day at 1,381.95. NYMEX crude oil futures gained 1.08 to end the day at 60.36 per barrel.

On foreign exchange markets the U.S. Dollar Index lost .19 to end the day at 83.41.

Interest rates were virtually unchanged from Friday’s close with the 2-year benchmark government bond ending the day at 4.72%, the 5-year bond at 4.53% and the 10-year bond at 4.53%.

Precious metals did better on the day with COMEX gold futures adding 1.80 on the day [up 11.20 from last Wednesday] to 641.20 per ounce while COMEX silver futures gained .05 [up .44 from last Wednesday] to close at 13.55 per ounce. The XAU Index gained .79 to 141.87 while the HUI added .32 to 340.58.

On tap for tomorrow, at 8:30 a.m. October Durable Goods Orders data is due – expected -6.0% vs. prior +8.3%. Then at 10:00 a.m. November Consumer Confidence data is due – expected 105.0 vs. prior 105.4. Also at 10:00 a.m., October Existing Home Sales data is due – expected 6.15M vs. prior 6.18M.

Wishing you all a pleasant evening and a happy and prosperous tomorrow!

Rob Kirby

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