The U.S. dollar has been on a downward spiral for several years now.
The trend started back in 2001 and the dollar has been in a clear downward trend since. Granted, the U.S. dollar has been declining since early 1900s and by some measures has lost over 98 percent of its value, but we should focus on the recent trend and what could happen in the next few months.
Since 2001, we have seen an explosion of negative data for the U.S. dollar. The economy may have been in hyper drive for the first six or seven years, but the extension of credit was clearly affecting the credibility of the U.S. dollar long before the financial crisis of 2008-2009.
There are pockets of U.S. dollar strength in the last 12 years, but they were all short lived. Back in 2005, when President George W. Bush announced the amnesty for U.S. companies to bring back profits at low tax rates, we saw a major rally in the U.S. dollar.
In 2008, we saw another major rally when the financial crisis broke. The so called flight to safety was the only tested remedy for a crisis situation. The sheep of Wall Street only know the path they are told about. Not using their own heads, they rushed their money to safety. So to escape the crisis in the financial crisis in the United States, they exited all investments and bought U.S. dollars and invested it in U.S. Treasurys.
That is called the “risk off” trade, folks. Go figure!
Fast forward to now. The U.S. debt has gotten much worse. It is now approaching $17 trillion. It does not seem like any real cuts are being made to the deficits. The tiny droplet called sequestration, where Congress had to cut $85 billion from its $1.6 trillion spending, has proven too much and the air traffic controllers are being called back.
Monday, Apple has announced that it will borrow $17 billion in the debt markets. The reason the firm is agreeing to do that is because of activist shareholders who want the company with the biggest stash of cash to borrow money and return more cash back to them. So they are advocating companies to borrow cash and spend it on dividends and share buy backs. That seems backward to me.
What it also tells us is that the interest rates in the United States are not going up any time soon. Companies will borrow more or borrow to return cash to shareholders only when they firmly believe the interest costs will be really low and for a long time.
The Federal Reserve leaked out word about two months ago that they might possibly start scaling down the printing of money sometime soon. But with the current release of data where companies are hitting profits but not revenue estimates, the slowing of the growth (gross domestic product) in the United States and the shaky consumers will likely put an end to even discussions about stopping the wonton printing of money.
So the current trend observed this year of the U.S. dollar strengthening seems to have screeched to a halt and is beginning to reverse for the past couple of days.
I suspect that with the Fed not coming out with details of when it will stop quantitative easing will confirm that it will continue to print more cash and that will lead to a stock market rally and a firmer decline of the U.S. dollar in the coming weeks.
I would advocate the buying of sound currencies like Australian, Canadian and Singapore dollars, the Norwegian krone and, if you have a strong stomach, the Brazilian real. In the next few weeks you may see they rise strongly if the Fed does what I suspect they are getting ready to announce.
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