Internationally the dollar has become resurgent in the face of a collapsing commodities market and a decline in national currencies almost everywhere. It still does not mean the United States dollar (USD) as the world’s reserve currency, is not in danger itself. Years of quantitative easing (QE), historically low interest rates and incredible amounts of debt, have taken their toll on the American dollar as well. Yet, the dollar has increased 19% in value since last July. This is an enormous increase for a currency under these conditions. It is a return of the United States dollar, as king over all other currencies.
However, to show that the dollar is under tremendous pressure itself, an investor need not go any further than the continuing strength of the precious metals market. Under normal circumstances as the USD moves up in value the price for gold, silver, platinum, palladium and rhodium should decline in price in equal measure. This is not happening.
Although these metals have declined in price since last summer, there has not been a 19% reversal in prices. Gold for example, has maintained between $1200 and $1300 USD, regardless of the movement in the American dollar. The same has been true for silver. This precious metal has kept up a price structure between $16 and $18 USD, during the same time period.
What is occurring internationally that is helping precious metals keep their worth, is that many investors are gradually losing faith in national currencies worldwide. In an attempt to stimulate economic growth central banks almost everywhere, are now engaged in policies that are leading to devaluations in paper money. This explains the present rigidity in prices for gold, silver and other precious metals even as the United States dollar is resurgent in a major rally.
Monetary policies of QE, interest rate cuts, purchases of debt and currency in international markets have led to a global downward pressure, on most of the world’s currencies. On top of this, a number of major countries are engaging in expansive fiscal policies, in an attempt to prop up domestic demand. It is all being done in the name of growth, but the results have been mixed at best.
The hope of political leaders in country after country is that currency devaluations will not only stimulate demand in the domestic market, but that it will be a boost for exports. Cheaper money reduces the international price for goods sold abroad, thus making them more attractive to buyers overseas. The problem with the overall strategy is when everyone is doing it, any temporary advantage evaporates over time.
Another advantage for currency devaluations is that consumers and especially cash strapped governments, are able to pay off debts with ever cheaper money. It in the end makes the annual deficits and overall sovereign debt much easier to manage. It is politically much easier than cutting spending or raising taxes. In some nations both have been attempted as in the case of Greece.
This policy known as austerity, is in full swing in the countries of Italy, Spain and Portugal. These governments have told their citizens, that there is no choice given the present economic dilemma. However, in Greece after 5 years of austerity the voters decided they were done with self-denial and voted in a new government recently. As part of a larger currency union these individual countries have been unable to enact a devaluation, but it has arrived anyway by way of the ECB (European Central Bank). Whether policy will follow political rhetoric in Greece, remains to be seen.
Europe is the biggest economic area in the world. In the last 7 months the Euro has plunged in value by a total of 19%. The announcement that the common currency zone of Europe, will now engage in a massive QE program over the objections of the Germans, will bring the Euro further down in value. It has gone from being worth close to $1.40 USD in the summer of 2014, to a low of $1.12 USD now. Parity is now quite possible later this year. Germany wanted to instead, continue economic structural reforms in under performing economies within the Euro-zone.
The Japanese have also watched their currency plummet in value over the last 3 years. QE and a massive fiscal stimulus, have taken the yen down 36% in 36 months. The yen has dropped from $0.0098 to $0.0085 USD since last summer alone. The government there has thrown everything it has, on the gamble that hyper-liquidity will return the country to economic growth.
The continued stagnation in Japan is much more complicated than the lack of easy money available for investment. Furthermore, the governmental actions concerning the Japanese yen have also reduced the competitiveness for exports coming from South Korea and China. The Chinese have already enacted some similar monetary moves and interest rate cuts and South Korea is moving to do the same.
The Russian ruble has plunged in value by more than 50%, in value against the United States dollar. The last time that Russia experienced such a drastic fall in the ruble, was when the country defaulted on it’s sovereign debt in 1998. Recent events in Russia, have led to the purchasing power of consumers there, to fall at an extraordinary rate. Wages have basically been halved, as has the value of the money in their bank accounts. The ruble has gone from a value of nearly $0.03 USD last summer, to below $0.016 and is still falling.
The double hit of collapsing energy prices and Western sanctions have devastated the Russian economy. There is no monetary policy that could possibly deal with these economic realities. As long as oil and natural gas remain in the lower price structure, the ruble will not recover. As a nation, Russia is just too dependent on energy exports.
Australia is a country that is somewhat overly reliant on the extraction and export of natural resources as well. The slowing economy in China has decreased demand for Australian coal, iron ore, and industrial metals. The slow down in this sector has greatly impacted the larger economy in Australia, costing it billions of dollars in lost revenue. The response of the government there was the recent reduction of the benchmark interest rate, to a record low of 2.25%, after a cut of 25 basis points.
It did revive the Australian stock market, but is also causing the currency to sink even further. More rate cuts are probably inevitable. In relation to USD, the Australian dollar has dropped from a high of more than $0.94 last July, to a low of $0.78 and is forecast to dip possibly, quite a bit more.
Neighboring New Zealand, India and Singapore are all easing their monetary policies, in an effort to stimulate growth and maintain market share with exports. There is a real chance that this race to the bottom, could ignite an actual currency war among nations in East Asia and potentially in other regions. This is especially the case, when competing nations are selling similar products, to the same areas of the world.
Canada similar to Australia, has an economy that is fairly reliant on the export of natural resources. This is not only to the United States and Europe, but to the growing economies of East Asia. The collapse of the commodities market has ravaged the Canadian economy. Rapidly declining prices for natural gas, oil, industrial metals, iron ore, coal and even timber, has created a ripple effect throughout Canada. The impact has led the Canadian Central Bank to lower interest rates there by 0.25%, bringing the main benchmark to just 0.75%. The end result has seen the Canadian dollar go from being worth $0.94 last July to a mere $0.79 now.
The accumulation of debt and monetary efforts to deal with it, have long been a hallmark of financial policy in Latin America. It goes hand in hand with the boom and bust cycles, that have long plagued the region. The economic leaders in South America namely Argentina and Brazil, have both expanded their supply of currency in recent years. Brazil for example, maintains it is to equalize the huge amount of foreign investment that has poured into the country in recent years, but the end result may be the same.
The enhanced value of the United States dollar will not last. It is just relative to most of the other currencies of the world, in a better position for the moment. QE officially ended in late 2014 and the Fed (central bank) is talking about raising interest rates, where practically everyone else is making reductions. The American economy has improved somewhat and the stock market continues to flirt with 18,000. In addition, official unemployment has decreased. The other advantage is due to divided government, despite the pleas of President Obama for major spending increases, the new Republican Congress will not permit discretionary spending to increase by 7%.
These present set of facts have allowed the United States dollar a resurgence. However, it only provides investors reassurance when one considers the alternatives. It is what this writer uses in the analogy of the dollar being the cleanest shirt, in the dirty shirt closet. It is the best option at the moment and has the additional advantage of being the reserve currency of the world. Most commodities are still priced in American dollars.
For investors who use USD or have access to them, this financial crossroad presents a unique buying opportunity. Assets outside the United States, as a result of devaluations elsewhere, are now on sale. If one is looking to invest in real estate, stocks, businesses, or other avenues of investment abroad, you would want to make a move soon.
The present strength of the United States dollar in contrast to other major world currencies will be short lived. When the American Stock Market begins to sputter and reverses later this year as the cycle of growth ends, investors will begin to look for other possibilities, outside the United States once again. Later as the economy in the United States dips into recession in 2016, money will begin to move out of the country at an accelerated pace.
Since interest rates are already at record lows and QE has run its course, the Fed will have limited options at it’s disposal. Government debt is already above $18 trillion USD and has doubled in the last 7 years alone, so there cannot be a major fiscal stimulus. Finally, any further priming of the currency printing presses, will simply lead to hyperinflation in the United States.
The advantage of owning USD at this time, will have a limited window of opportunity that should be fully exploited, over the next few months. The Day Trading Academy will attempt to assist investors in this endeavor, through access to the Investment Newsletter.