Euro Falls to New Low Against the Dollar

Front and center this morning, the euro (EUR) has lost more ground overnight, falling to a 14-month low, trading below 1.25 for the first times since March of 2009. Recall, that in March of 2009, the risk assets turned on a dime, and it wasn’t too far into spring that everyone was dumping dollars again… But that was then…

You know… I have to wonder where all these guys were that are now saying this, that and the other thing about a collapse of the euro, a year ago… Shoot Rudy, six months ago! But, that’s the thing that brings these guys out of the woodwork… When an asset begins to go down, the beating begins, and doesn’t stop, until someone says, “that’s enough!”

Having said that… I just keep thinking about the euro aid package… Yesterday I told you that I believed that the aid package was not helping the euro, but instead other risk assets. Well… The more I think about this, the more I come to the realization that maybe, just maybe, this is the beginning of the end for the euro as the offset currency to the dollar… I DID NOT SAY IT WAS THE END OF THE EURO! I said, the end as the offset currency to the dollar… Which would bring the euro back to pre-2002. If you remember those days, the euro fought for every inch of credibility it could get… That could be the euro’s future once again unless the Eurozone parliament axes the PIIGS (Portugal, Italy, Ireland, Greece and Spain)… And stood on the solid ground of Germany, France, Austria, Netherlands, Finland, Belgium and a few others.

There is a way for the Eurozone officials to throw a lifeline over the Union… And that is to gain taxing power over all nations in the Union… Then… They would be like states of the Union… But I don’t see that happening, any time soon.

You know… The traders, and hedge fund managers, and investors of the world really have blinders on, right now, with the focus on the debt problems of the European Union’s bad boys… But shoot Rudy, why not take the blinders off and see the whole debt picture?

Looks like the Bank of England’s Governor Mervyn King has taken his blinders off… King was pointing out last night that the US has many of the same problems haunting Europe… Hey, Mervyn… You are now my new “Mr. Obvious”! But, you do get a gold star for taking the blinders off, and trying to point out that this debt problem is not just a Euro problem…

I’ll give you an example of the garbage we see in print and on the cable news here in the US… Yesterday, the Weekly Initial Jobless Claims printed… And the headline on the news story that came across my screen said, “US Claims fell to 444,000 last week”… Now, if you weren’t a reader of the Pfennig, and know better, someone might read that and say, WOW! Thinking that “fell” meant by a huge amount…. But in reality, the number “inched down” by 4,000… That’s it! Give me a break!

While I’m on the US and their own debt problem, which is far greater than the total of debt problems in the Eurozone, but don’t let that get in the way of a dollar rally.

The CBO (Congressional Budget Office) has just concluded, for example, health care reform will cost the federal government much more than originally projected.

With new health care legislation, US federal deficits will exceed $1 trillion for many years to come, even with repeal of the Bush tax cuts for families over $250,000 and the interest and dividend tax. The President’s pledge not to raise taxes on families under $250,000 puts Washington in a fiscal box… You think? Yes… I know it does!

But is the dollar getting hammered? Hmmm…

Earlier this week, I told you about spending measures being cut in Spain and Australia… Now, I see that Ireland is also getting their ducks in a row with regards to spending cuts… Good for Ireland!

Hey! Greece had to agree to spending cuts, Spain has announced them, along with Ireland… Have we heard of any spending cuts here in the US? Oh come on… That 1/4-penny trick I showed you a couple of weeks ago that represented the spending cut by the President doesn’t count!

OK… Enough with Europe and the US.

In one of the best performing countries on the planet, Brazil, the Brazilian President, Lula, was boasting about his budget cut of 10 billion real ($5.6 billion dollars)… This is a case of the Federal government helping the central bank in their fight against rising inflation… I don’t see this allowing the central bank to jump off the rate hike train because of the spending cut… Interest rates in Brazil are going higher still, and that should remain an underpin for the real.

In New Zealand, retail sales, printed for March, and were not as strong as forecast… Retail sales rose by 0.5% versus a forecast of 1.1%… This is disappointing to those, including me, who thought this would be strong enough to give us a clear sign that the Reserve Bank of New Zealand (RBNZ) would raise rates at their next meeting in June. Now, we’ll have to look for other clues, as we go along the rest of May and up to the meeting in June… For now though, I’m going to go out on the big fat limb (need a big fat one for me) and say the RBNZ will still raise rates next month.

The retail sales’ slower print put a dent on a kiwi (NZD) rally, though…

And in China… Looks like the Chinese are seeing the benefits of allowing cross border transactions in renminbi (CNY)… The Chinese announced that they would be expanding cross border transactions in renminbi to as many as 18 more provinces… The key here for you, folks, is that when this is done correctly, it eliminates the need for US dollars… Eventually, China will make the renminbi available for international trade… And when that happens, the damage to the dollar will be HUGE!

Yesterday, gold was down about $20 from the previous day’s new all-time high… This morning, gold is up $13 and back to $1,246. You know… Gold hasn’t just been gaining versus the dollar… Gold is up against most currencies… And… If I were living in the Eurozone, right now, I would be buying gold hand over fist, and when I got enough, I would then buy resource rich countries like Norway and Canada…

The same would go for anyone here in the US who hasn’t gotten on the gold train…

Then there was this… My friend and former colleague, writing and marketing master, David Galland was asked at his recent conference how high gold could go… He made some very good points, which I’ll highlight here…

“While the US is no Zimbabwe – at least not yet – its currency is just as intangible, for the simple reason that the government can print the stuff pretty much at will. To say that gold will go to $5,000 in the current crisis is really just another way of saying that the dollar currency unit will fall by some significant degree. But, given the uncertainty in the economy, and unknown of what actions the government and the Fed might take next, we really can’t know how much purchasing power the currency unit will lose in the months and years just ahead.

“To date, the government has been extraordinarily – breathtakingly – willing to abuse the dollar. They have largely gotten away with it so far, but that certainly doesn’t mean they have gotten away with it. When the time comes for the piper to be paid, we suspect he’ll be paid pennies on the dollar… which could easily result in gold trading for $3,000, $5,000, $10,000 per ounce – but, who knows, maybe even $10,000,000,000.

“The point is, given the choice between dollars and gold, you are far more likely to preserve your wealth over the duration of this crisis better with gold.”

Thank you David… You are the key master!

To recap… The euro has fallen to a 14-month low, trading well below the 1.25 figure for the first time since March of 2009. Spending cuts are being announced all around the world, and it’s about time! New Zealand’s retail sales figure disappointed but was still positive, and gold rebounds $13 this morning…

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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