France Against US Dollar Dominance

Well, the euphoria around the risk assets of currencies and commodities got watered down as the day went on yesterday, and that continued throughout the overnight and morning sessions in Asia and Europe. The currencies and commodities haven’t turned on a dime; they just stopped moving higher versus the dollar… Although, now that I’ve said that, the euro (EUR) has dipped below 1.45…

I guess stocks still hold some sort of stranglehold on the risk asset classes of currencies and commodities, as earnings from Alcoa (AA) missed their forecasts, and the news rocked stocks. I was hoping that we had left this association of stocks and currencies/commodities on the side of the road! The pull doesn’t seem as strong, but there’s still some pull, and that’s what’s stinging the non-dollar currencies (except yen) and commodities this morning.

Another story making the rounds this morning is a quote from the Chinese Sovereign Wealth Fund that said, “US dollar has hit bottom with limited room to fall further”.

Be careful reading too much into that statement by the Chinese Sovereign Wealth Fund… They have to make certain their dollar denominated investments don’t fall through the trap door, so they make statements to support their investments. That’s how I see this.

One non-dollar currency that has really been on the rise so far this year, has been the Indian rupee (INR)… And for good reason! Last night, India reported that their industrial production grew at the fastest pace in 25 months last November. WOW! So, it’s not just China that’s growing quickly in Asia. Here are the details… Output rose 11.7% in November versus the same period a year ago… Add to that figure the 10.3% gain that was booked in October, and you’ve got yourself one hoppin’, skippin’ and jumpin’ economy! And that’s why the Indian rupee has already added almost 2% to its 4.9% gain in 2009… And that was with the Indian Central Bank putting a governor on the rupee for most of the year!

Funds are flowing into the Indian markets at a very fast pace these days, and could now be getting even faster, for any central bank worth their weight, would view these Industrial Production reports from October and November of 2009, and relate that to the need for a rate hike!

In Sweden this morning… Swedish inflation surprised to the upside for the second consecutive month, and… Both months were above the Riksbank’s (Swedish Central Bank) target of 2%. This month’s figure was 2.7%, which isn’t just a tiny bit above the 2% target, it’s a raging figure over the 2% target! And since this is two months in a row, one would think that the Riksbank would be entertaining thoughts of rate hikes soon!

In Australia… Their first month of no government stimulus to fuel home buying saw the number of homes bought in November fall by 5.6%… And this was before the Reserve Bank of Australia (RBA) hiked rates for a third time in December! So… On our ledger, where we are keeping score for the RBA, this is the first piece of data to go on the “con” side of the ledger.

A couple of Australian readers (yes, there are Pfennig readers all over the world!) sent me a note about my discussion on Australian jobs yesterday… It seems that the numbers reported were “seasonally adjusted” and therefore did not reflect the real numbers, which were considerably less than reported… So, we’ll take that piece of data off the “pro” side of the ledger for now.

While we’re in the South Pacific, Australia’s kissin’ cousin across the Tasman, New Zealand, saw a HUGE jump in their Capacity Utilization data for the fourth quarter, as the index increased from 88.4% to 91.1%, which happens to be the highest level for Capacity Utilization since June of 2008.

You might recall June 2008, it was “the calm before the storm”, which was unleashed while I was standing on the stage at the Agora Financial Investment Symposium in Vancouver, BC.

I came across a story last night that really got me all riled up… It was another talking head spouting off about how the Fed is going to be raising interest rates aggressively very soon, and that that will bring the dollar back into the positive.

Hmmm… I guess this talking head isn’t paying attention to the statements by the Fed Heads, who made certain that they all sang from the same song sheet yesterday, saying that the low interest rates will remain for some time.

But I prefer to listen to Bill Gross… Bill Gross, the head of the world’s biggest bond fund, PIMCO, said, “The US economy is too fragile for the Federal Reserve to back away from its stimulus measures. Four percent of the viable workforce has given up and dropped out. To think the economy can snap back in the face of that is a bit of a stretch.”

The other day, Ty Keough sent me a note from well-respected analyst Puru Saxena, who had this to say about the future of the dollar…

“America has run out of choices and if the Federal Reserve does not inflate away this mountain of debt, the biggest sovereign default in history is guaranteed. Given the ability of the Federal Reserve to create confetti money, we are convinced that it will opt for the inflation tonic. Remember, inflation dilutes the purchasing power of each unit of money and it will make America’s debt more manageable. Of course, this inflationary agenda is not a secret and this is why many creditor nations with huge reserves are beginning to diversify out of the American currency.”

Hmmm… Yes, it did sound like the stuff I’ve been telling you for years now, but at least you got to hear it from someone else!

Well… Today, the data cupboard will yield the trade deficit for November… Recall, that last month we saw the October trade deficit jump higher – to almost $33 billion… Well, the November deficit is expected to be $34.6 billion.

We just can’t seem to get past this trade deficit hangover… I don’t think my remedy for a hangover – a Quarter Pounder with cheese, fries and a large Coke – is going to help here either! And when the economy turns around, and people go back to work, and begin spending more than they make once again, we’ll find out that we didn’t learn one single lesson during the recession… And this trade deficit will begin to soar once again.

Tomorrow, the data cupboard will yield the Monthly Budget Statement, (read deficit!) for December, and it is expected to be around $92 billion… So, with these two deficits back-to-back – if fundamentals are really back on the table – the dollar should get sold like funnel cakes at a state fair… But we’re not sure about the fundamentals yet, especially with the stocks having some pull still.

Then there’s this… For those of you who were around… Do you remember what happened in August 1971? Yes, that’s when Richard Nixon closed the gold window, removing gold as the backing for dollars. He did that, because France’s Charles de Gaulle, called the US’s bluff that they had enough gold to back their IOU’s, and when that happened, Nixon had to shut the gold window and make the dollar a fiat currency.

Well, here we are in 2010, and another French President, Sarkozy, is making things difficult for the dollar… French President Nicolas Sarkozy urged for an end to the US dollar’s global dominance, warning that its weakness poses an “unacceptable” threat to European competitiveness.

“The monetary disorder has become unacceptable,” said Mr Sarkozy, who later this month is due to address the world economic forum in Davos. “The world is multi-polar, the monetary system must become multi-monetary,” he said in an apparent call for other currencies to be promoted over the greenback.

The dollar has weakened considerably against the euro in the past year, making euro-priced exports more expensive and putting Eurozone producers at a competitive disadvantage.

Mr Sarkozy said last week that the dollar’s weakness posed a “considerable” problem for French businesses and should be “at the centre of international debate”.

Then he went on to tell a Paris conference on new approaches to capitalism that “we cannot fight in Europe to improve the competitiveness of our businesses…and have a dollar that is losing half of its value”.

“A dollar-based system…might have made sense in the 20th century but doesn’t make sense in the 21st century.”

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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