Boomerang effect of Gold!
It’s 1999 déjà vu. The state of US dollar now, is quite similar to what Gold was at that time.
The fundamentals of the US economy appear to be
inversely proportional to the optimism of Ben Bernanke. Declining home prices, rising foreclosure rates, a weak dollar and high oil prices; not to mention a crisis of confidence in the credit markets, yet, if Ben were to be believed, all suggest a period of moderate, but positive growth going forward.
One of the most potent faces of the US economy – the US dollar is having a tough time battling out for the crown and trying to regain its glory. ‘Absolute nonsense’, ‘Life threatening’ & ‘passed the pain barrier’ were some of the few adjectives used by policy makers, on the other side of the Atlantic, recently, commenting on the dollar-euro exchange rate (certainly, this wouldn’t have been on Bush’s mind, when he hired Ben Bernanke to clean up Alan Greenspan’s mess). It doesn’t stop here; the US dollar, now being used to pay for the purchase of higher yielding currency, is proving to be most profitable. According to Bloomberg, a basket of currencies including the British pound, Brazilian real and Hungarian forint, financed with dollars, returned 17% this year, compared with 9% funded in yen and 7% in Swiss francs. “Falling US interest rates & increasing volatility in the yen and franc, are making the trade even more appealing,” says Avinash Persaud, Chairman, Intelligence Capital Ltd.. US dollar as a carry trade currency!?!?
The US dollar is also trading at a record low against the Euro. “We suspect that having pushed the euro/dollar to within a whisker of a key psychological level, the market’s appetite has now been whet for a move above and beyond 1.50 and a fairly busy week’s data schedule offers up no shortage of potential catalysts in this respect,” said Neil Mellor, a London-based currency strategist at Bank of New York Mellon. The US dollar is now entirely supported by public flows into the US, which are largely purchased by central banks. Private flows into US are negative and gradually central bankers will also realise that to invest their reserves into US dollars is not the most desirable option and, therefore, in the long term, the dollar should continue to depreciate relative to assets, which are not ‘over-supplied’ – as is the case for the US dollar. In fact, the latest figure from the International Monetary Fund, testifies the above statement. As per IMF, the dollar made up 64.8% of central banks’ currency reserves in the second quarter of 2007, down from 71% in 1999.
The current time reminds one of what happened to Gold in the late 1990s when central bankers, world over, were dumping Gold and it fell to a low of $278 an ounce. Central bankers were hoarding US dollar and it was at that time when the US dollar composition of central banks’ currency reserves was as high as 80%. Circa 2007, tables have now turned in favour of hard assets like Gold, which is close to its life time high and is trading at $850 an ounce, whereas dollar appears to be in doldrums.
The fundamentals of the US economy appear to be
inversely proportional to the optimism of Ben Bernanke. Declining home prices, rising foreclosure rates, a weak dollar and high oil prices; not to mention a crisis of confidence in the credit markets, yet, if Ben were to be believed, all suggest a period of moderate, but positive growth going forward.One of the most potent faces of the US economy – the US dollar is having a tough time battling out for the crown and trying to regain its glory. ‘Absolute nonsense’, ‘Life threatening’ & ‘passed the pain barrier’ were some of the few adjectives used by policy makers, on the other side of the Atlantic, recently, commenting on the dollar-euro exchange rate (certainly, this wouldn’t have been on Bush’s mind, when he hired Ben Bernanke to clean up Alan Greenspan’s mess). It doesn’t stop here; the US dollar, now being used to pay for the purchase of higher yielding currency, is proving to be most profitable. According to Bloomberg, a basket of currencies including the British pound, Brazilian real and Hungarian forint, financed with dollars, returned 17% this year, compared with 9% funded in yen and 7% in Swiss francs. “Falling US interest rates & increasing volatility in the yen and franc, are making the trade even more appealing,” says Avinash Persaud, Chairman, Intelligence Capital Ltd.. US dollar as a carry trade currency!?!?
The US dollar is also trading at a record low against the Euro. “We suspect that having pushed the euro/dollar to within a whisker of a key psychological level, the market’s appetite has now been whet for a move above and beyond 1.50 and a fairly busy week’s data schedule offers up no shortage of potential catalysts in this respect,” said Neil Mellor, a London-based currency strategist at Bank of New York Mellon. The US dollar is now entirely supported by public flows into the US, which are largely purchased by central banks. Private flows into US are negative and gradually central bankers will also realise that to invest their reserves into US dollars is not the most desirable option and, therefore, in the long term, the dollar should continue to depreciate relative to assets, which are not ‘over-supplied’ – as is the case for the US dollar. In fact, the latest figure from the International Monetary Fund, testifies the above statement. As per IMF, the dollar made up 64.8% of central banks’ currency reserves in the second quarter of 2007, down from 71% in 1999.
The current time reminds one of what happened to Gold in the late 1990s when central bankers, world over, were dumping Gold and it fell to a low of $278 an ounce. Central bankers were hoarding US dollar and it was at that time when the US dollar composition of central banks’ currency reserves was as high as 80%. Circa 2007, tables have now turned in favour of hard assets like Gold, which is close to its life time high and is trading at $850 an ounce, whereas dollar appears to be in doldrums.
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