The U.S. dollar is down dramatically in the last 3-months and the U.S. stock market has been one of the worst performing equity markets. Clearly US assets are not in favor. It appears that this is a vote against the U.S. economic system (the Federal Reserve and US Treasury).
While we have seen the appetite for risk assets increase over the past couple months, it is difficult to attribute the decline in the U.S. dollar to this asset shift. There is clearly something else going on as investors have been buying precious metals (Gold, Silver and Platinum should be going down because they are seen as safe havens in times of financial instability). In fact, global political rhetoric is almost as much evidence as we need to convince ourselves this is not the case. Recent public statements by Russian President Dmitry Medvedev highlight this point. His quotes are below:
“The dollar is not in a spectacular position, let’s be frank, and its prospects cause various questions as do the prospects for the global currency system.”
As to a new global currency Medvedev said:
“This idea has potential, even though some of my G-20 colleagues aren’t actively discussing it at the moment. However, for example, in the opinion of our Chinese colleagues it is quite a possible step. The most important thing is not to walk away from discussions on this topic.”
In the last statement, Medvedev is obviously appealing to China, who has voiced similar concerns as recently as this week with Treasury Secretary Geithner’s visit to China. Over the past 9 – 12 months, this call by the Chinese has been getting louder and louder. In a April 17th note entitled, “Is China Advocating for the Bancor?”, we quoted Dr. Zhou Ziaochuan, a primary player in determining Chinese fiscal policy, who wrote the following in an essay:
“Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named “Bancor”, based on the value of 30 representative commodities.
A key catalyst in this political rhetoric will occur on June 16th, when the Russians, Brazilians, Indians and Chinese meet in Yekaterinburg, in the Ural Mountains. The Russians and Chinese have already played their cards, and they will only turn up the volume on the rhetoric encouraging their Indian and Brazilian “colleagues” to do the same.
In the short term, one of the quickest ways to strengthen the U.S. dollar is for the Fed to raise rates, although this will certainly kill off prospects for recovery. However their hand will likely be forced on the inflation front. That is, if the U.S. dollar continues to break down, reflation will turn into inflation, and the Fed will start raising rates. The FED raising rates within six months! Now that is contrarian…….Either which way continue to position yourselves for higher rates (lower bond prices) and higher commodity prices….and of course a lower USD.
Take a look at the two graphs below – looks like these trends are just getting into gear!
