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« COMEX: The longs take deliveries! | Main | Yamana Gold Incorporated: Call Options Bought! »
Monday
Dec012008

US Dollar Rally Losing Momentum

As the chart below shows, the US dollar has enjoyed a terrific rally in recent months, rising from 72 to 88 on its index.

US Dollar 021208

This has been the result of, not so much a flow into the dollar, but a flow out of most other currencies, and the unwinding of large leveraged USD short positions together with the unwinding of stock positions bought on margin.

The Federal Reserve began slashing rates and devaluing the dollar as soon as they smelt a problem, but other central banks were slower to act. Therefore now with the Fed rate at 1%, there is not much more room for rate cuts. However in other currencies there is still room for cuts, with England at 3%, the EU at 3.25%, Australia at 5.25%, Canada at 2.25% etc. Therefore the perception is that these currencies can devalue a lot more, relative to the dollar, since there is room for more cuts. Currencies with rates at 1% or below, such as the USD and the Japanese Yen, are moving up against these other currencies.

However this rally in the greenback appears to be running out of steam as the USD encounters some resistance at the 88 level.

US Dollar Rally Losing Momentum 021208
(Click image to enlarge)

Recent trading between 88-85, the greenback looks to be consolidating, but do not jump to that conclusion to early. In current market conditions, the one thing that can be relied on is volatility, so we expect the USD to snap out of this trading range. This will probably be with a move to the downside, as the negative MACD indicates. Also note how far the USD is above its 200ma, this gap must close and we see this close being caused by a correction in the USD, down towards the long term support at 80.

After all, the fundamentals for the USD are not getting any better, not by a long shot. A worsening American economy, coupled with recent statements from Bernanke saying that not only will the Fed be prepared to cut rates again, they also have another trick up their sleeve. Bernanke said:

"The second arrow in the Federal Reserve's quiver - the provision of liquidity - remains effective. The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand."

This is a policy called quantitive easing. Not sure what that means? It means the Bernanke led Fed aims to dramatically increase the money supply. Still confused? Imagine Ben and his colleagues printing money and throwing it into the system. Get the picture? This is what “Helicopter Ben” has long said he would do to prevent a depression, and now he is confirming that that is what will happen. This tells us two things. Firstly, the Fed thinks there is going to be a depression if they do not act, and second, the risks of serious inflation, possibly hyperinflation, have skyrocketed.

The Fed’s expansion of the money supply will be ineffective at solving the problem, and will result in serious inflation, possibly hyperinflation down the line. It will also send the dollar back down on its bear market collapse and gold soaring. In the short term we expect the USD to break down through 80 whilst gold should start making a base around $800, before moving upward to challenge its old highs in the medium term.

If you haven’t bought a position in gold, do so NOW. If you’re holding on to gold mining stocks, then keep tight hold, as they should benefit from coming higher gold prices, as the USD begins to decline.

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Reader Comments (6)

damn, i sure hope so ! im getting sick and tired on days like today watching the short and ultrashort etfs soar thru the roof and seeing my gold and silver stocks drop like a rock with the rest of the market !!!

December 1, 2008 | Unregistered Commenterjill

Amen (without the religious part).

Read this also:
http://seekingalpha.com/article/108737-don-t-give-up-on-gold-just-yet?source=article_lb_articles

In my opinion, gold is stabilizing momentarily, finding its way in rural markets. Around 800 we found a base.

The only problem I have for gold is inflation NOT becoming visible in the economy for now.
Inflation cannot be measured, only to feel the effect of it in pricing of goods. And when banks are torrented with FED bailout money to cover holes of debt. Also with monetary velocity (interbanking lending) at near zero, I think we're a long way from a rise in prices for goods etc.

I hope I'm wrong and if so, gold and copper will be the first indicator to show me I am.

brgds

December 2, 2008 | Unregistered Commenterde Graaf

The dollar will "rally" again should the price of oil start climbing above $50/barrel. Its all about sticking it to Russia, Venezuela, and Iran. A crude(no pun intended)strategy that will probably fail in the long run, and will have only served to make our exports vastly more expensive.

December 2, 2008 | Unregistered CommenterAnon

Your article makes sense but you and all the other contributors forget that the crisis control team always interfere in any trend that sees the price of gold go up. Especially Volker should be the first to pounce.

December 2, 2008 | Unregistered CommenterR

From a goverment perspective, it makes a lot of sense to pressure gold and keep the dollar up for now. Its ensures that the dollar remains the 'safe haven currency' for as long as unstability explains the markets.
For the US government to keep that 'currency stability' for the dollar, is effectively making Treasury bonds sell like hell, so to say.

If you look at this long term. Inflation will rule the real economy, debasing the currency and sending prices higher for basic goods. Next to that, US Treasury longer term debt sold to foreign investors, will erode over time by paying it off with the inflating (electronic and paper) printing press. Printing more money, makes it so much easy to pay-off the nominal debt amount.

Basically a cigar from the lenders own box.
The contrast however, is this; It makes the pain last even longer for its US citizens. 'Quantative easing'...for their own political win.

December 2, 2008 | Unregistered CommenterB

I found this article very interesting. I understand that it is a purely technical analysis, and I use both technicals and fundamentals. I see a well defined wave 1, wave 2, and wave 3 in your charts, but where is wave 4 and wave 5? Is it possible that we are simply looking at a Wave I beginning of a much longer trend (like the counter trends that have been taking place since 1933, lasting for years.)?

What I find many analysts ignoring is the magnitude of the deleveraging. I have heard 40 to 1 talked about, and I assume this is the reserves of capital to the actual underlying loan value. I'm skeptical, of course. I have credit card limits that exceed my annual income, and I think the generous sponsors are coming to the conclusion that they don't have a penny of reserves to these credit limits. That would make the leverage infinity to 1. I use credit cards for current operations but never pay any interest. So it is convenient and I get perks. This isn't the case of most collateralized loans.

I have also heard figures like $500 trillion to $600 trillion total global value of derrivatives, $100 Trillion total global assets, and $50 Trillion total global commerce. One must assume this is all based on the original calculations of 40 to 1 leverage.

My fundamental conclusion about the dollar breaking down it this: If Congress has authorized an increase in the National Debt of $1.5 Trillion to roughly $11 Trillion, is this going to create significant inflationary pressure when compared to the numbers in the previous paragraph?

Will the dollar break down, if it is the only currency being accepted to pay the majority of debts globally? Won't the dollars in the mattress continue to gain value for the forseeable future, until a majority of the debts are satisfied, either through repayment, or bankruptcy, foreclosure, repossession, and litigation?

I have a years gross income in Gold and Silver Eagles. I have noticed that even though they have decreased in value relative to the dollar, they will still buy the same goods and services as when I bought them from 1998 to 2003. So I am not proned to sell them, as I don't have any debt that needs satisfying.

December 7, 2008 | Unregistered CommenterAnon

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