Tags: dollar | US | AIIB | Teflon

How Long Can the US Dollar Ignore the Signs?

By    |   Wednesday, 01 Apr 2015 08:24 AM

Teflon Dollar.

That name would be appropriate for the U.S. dollar these days. It can do nothing wrong. No matter what any says, or does not say, the U.S. dollar heads higher.

Let's analyze the short- and long-term situation as it defies gravity.

In the short run, the dollar should have weakened when the Federal Reserve withdrew the accommodative word "patience" at its last meeting but clearly indicated that the rise in interest rates is not imminent since the strength of the economy is not yet strong enough and that the jobs growth is not quite right.

Given that the currency markets had pumped up the U.S. dollar in the past several months, expecting a rise in interest rates and a robust GDP growth in the U.S., this statement from the Fed should have weakened the dollar quite a bit. It headed down immediately, spiked up, slid down a bit and is now headed up again. So the rally in the emerging markets fizzled in less than a week.

Fundamentally, the U.S. dollar is overbought and the euro oversold. Yet there seems to be no end to the continual rise of the U.S. dollar. A clear sign that the currency markets are getting even more lopsided is the widening of the spread between a currency pair as it is sold forward onshore versus offshore. As this spread widens in the emerging market currencies, it is apparent that the U.S. dollar long trades are firmly in place and growing.

Let's look at the longer-term fundamentals. As we all know, the U.S. debt is unsustainable. The debt is now well above the $18 trillion mark and almost mathematically impossible to pay down. One of the landmarks of a bankrupt currency is for its government to devalue its currency so that the debt could be paid down in cheaper currency. The U.S. played this game quite well for a long time. Yet now it seems helpless as the dollar soars, making paying down of the debt even a further dream than before.

Cracks are beginning to appear in the U.S. growth story and the so-called booming housing markets is clearly in a stall mode now. U.S. corporations have already announced weak earnings due to the strong dollar and have issued earnings warnings. Second-quarter results will be worse than first-quarter results are. The stock market surge upward seems to have halted with large swings, and after three months, the stocks are nearly flat compared with start of the year. Yet the dollar shows no signs of abetment.

From a geopolitical standpoint, the U.S. has shot itself in the foot and is now seeing increased hostility to the U.S. dollar. Last July, I wrote to you about the new challenge to the World Bank and the International Monetary Fund (IMF). Asian countries, after being ignored by the IMF and World Bank for decades, decided to challenge the Western hemisphere dominance by announcing their own world financing body, the Asia Infrastructure Investment Bank (AIIB).

At that stage the U.S. ignored this ominous threat as a joke and waved it off. At that stage, we had China lead the effort with India, Russia, Brazil and South Africa as its charter members. Australia wanted to join, but the U.S. strong-armed Australia from joining.

Today many of the U.S. allies such as the United Kingdom, Austria, Switzerland and Australia have joined dozens of other countries around the world in the anti-dollar alliance. Other nations, which also include most U.S. 'allies' in Western Europe like Germany, France and the U.K. have all signed on to be founding members of the AIIB.

The AIIB is now the biggest disruption to the global monetary system since the end of World War II.

The U.S. government has not made many friends. It now even brazenly spies on its own allies. Nearly every other nation out there has had enough.

Unlike, say, the World Bank, which is totally dominated by the United States, China freely gave up veto power in AIIB . . . showing willingness to share power with other nations.

Even Canada is now considering joining AIIB.

Is it time to sell the U.S. dollar now before there is a mad rush and the dollar goes into free fall? Or will the Teflon coating continue to protect the dollar for some time?

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Teflon Dollar. That name would be appropriate for the U.S. dollar these days. It can do nothing wrong. No matter what any says, or does not say, the U.S. dollar heads higher.
dollar, US, AIIB, Teflon
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2015-24-01
Wednesday, 01 Apr 2015 08:24 AM
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