One of the more interesting aspects of the Libyan and Japanese crises was that the dollar fell — a lot. Normally, in times of crises, world investors tend to move into the dollar. It is viewed as a safe haven.
However, during these crises, the dollar fell to historic lows against the yen, before massive international central-bank intervention reversed the fall.
The euro has also gained strongly against the dollar. Most importantly, the Dollar Index, which weighs the dollar against a basket of foreign currencies, fell to 75 currently from 80 in January. This may not seem like a big change, but in the currency markets, these changes are pretty dramatic.
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Although I wouldn't say this is the beginning of the end for the dollar, it is certainly another sign of what I think will be an increasing lack of confidence in the dollar as a safe haven.
This change in psychology will be critical for foreign investors as inflation begins to move higher and begins to more seriously affect foreign interest in U.S. bonds, and ultimately stocks as well. If foreign investors begin to decrease their massive support for U.S. stock and bond markets, both the dollar and those markets will begin to suffer an irreversible decline.
Short term, I think the dollar is a bit oversold and will likely rebound somewhat.
There are always multiple reasons for such a fall in the currency — it’s not all just a growing lack of confidence in the dollar — and some of those reasons will change toward the upside. But it’s hard to overlook what is likely a growing sense by foreign investors that the financial condition of the U.S. government is weakening.
It is front-page news that the U.S. has too much debt and is doing little about it. In fact, we are only adding to it at increasing rates. Even worse, we are trying to make it easier to add debt by printing massive amounts of money.
In an upcoming issue of the Financial Intelligence Report, I will be reviewing what I feel are key economic indicators to look at in the next few years.
Two of the most important indicators are foreign inflows of capital into the bond market and foreign flows into the stock market. By watching these indicators in the remainder of the year, we will be getting a better feel for whether foreign investors are getting increasingly nervous about the dollar.
These kinds of changes don’t happen quickly, but when they do happen, they are hard to turn around.
About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $80 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here
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