The Obama administration is wasting no time implementing policy changes to dig the United States out of recession. However, some of these may end up hurting the U.S. dollar and helping foreign currencies.
First, there's the new administration's accusation of China as a currency manipulator. I think this was the first mistake of the new Treasury Secretary Tim Geithner. He hadn't even been confirmed yet when he told the Senate Finance Committee that President Barack Obama thinks that China is manipulating its currency. Geithner hasn't even taken the first trip over there as the Treasury Secretary to meet and talk with these guys. Yet, he starts off on a sour note, only with one of the biggest holders of U.S. Treasurys in the entire world.
So much for Geithner trying to work with China. We are quickly closing that door. China is not just going to alter their currency just because the United States says so. They have their own agendas that they have to be concerned with. At least Paulson realized this and tried to reason with China.
The result was you saw the Chinese yuan strengthen about 5 percent to 6 percent a year for several years back to back. Paulson coaxed them into a 15 percent move over three years, and Geithner is trying to remove all of the headway that we've made with the Chinese.
On one hand, he has already learned to chant the Treasury mantra, "We are supportive of a stronger U.S. dollar" which has become somewhat of a joke to anyone who has followed the dollar the past few years. They were "strong supporters" of it all the way down to 30 year lows on the U.S. dollar index.
However, Geithner also said that Obama wants a stronger yuan, which in essence means that they want a weaker dollar against it, too. You can't want a strong dollar and a strong yuan at the same time.
It seems that Geithner and Obama could stir up a whole economic war if they are not careful. We need China to continue to buy up our Treasurys, yet there's nothing that says they have to continue to do so. But why would you want to still buy bonds from a country with an administration that strikes out against you the first moment it gets into office? We'd better remember to think about what we would do if the tables were turned.
So, that's the first problem as I see it. The political instability that this is bringing about can not be good for the U.S. currency. It doesn't mean that the dollar has to tank in the upcoming days, but it does mean over the course of the next year, Obama may be setting the buck up for a fall.
China has responded to these allegations and said that they have not manipulated their currency for the gain of their exporters. They've also stated that they will keep their currency stable and will not depreciate it.
Next, there's the Obama Administration's idea of creating a "bad bank." Keep in mind that equities and foreign currencies have followed each other very closely this last year. If the government creates an aggregator bank in order to transfer the bad debts of these banks onto the "bad bank," then it could cause all of the shorts in the financial sector to run for cover as there would be a huge possibility of stocks rallying. This would be good for stocks but horrible for the buck.
The dollar and the yen both benefited as stocks and foreign currencies all dove around the world. If stocks start to rally, money will pour out of the buck and the yen and head back into foreign currencies which carry a higher interest rate yield than the U.S. dollar does. So, that's the next stumbling block coming ahead for the U.S. dollar.
Now, let's look at the third problem for the dollar: gold.
Obama is already preparing the nation for deficits that run into "several trillion dollars," as former central banker Volcker put it last week.
The Obama administration is bent on getting banks to lend again. Once this does happen, growth and inflation will resume. That will be a plus for both stocks and commodities, namely gold, but it will wreak havoc upon the dollar.
Savvy institutional investors already are starting to buy up gold in preparation for the coming wave of inflation that will return over the coming months.
Therefore, you will see the price of gold at much higher levels at the end of 2009 than you see them at now. Inflation drives gold higher.
So, get ready to go back into the former mode of stocks up, commodities up, and dollar down!
The fundamentalists see this coming. But even the technicians out there are starting to take note of the rise in gold above its 50-day moving average and then its 200-day moving average. They also see a bullish head and shoulders pattern forming too.
Both the fundamental institutional investor and the technical institutional investors are starting to see signs that the metal is perking up once again. This will eventually catch up to the dollar in the coming months and money will flow out of the buck and back into gold and foreign currencies, especially the euro and Aussie dollar.
So, that's the third hurdle as I see it that faces the dollar shortly. I really think that a combination of these problems will gang up on the dollar.
It won't be too much longer before you see equities head higher and when that happens, institutional traders will have the green light to exit the dollar and go back into currencies that have been beaten down and that also happen to have a higher interest rate yield than does the buck.
Don't expect to see a multi-year rally here for the dollar. Its fate will be doomed soon, thanks to what I can an Obama-nation (abomination) of the dollar.
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