Thursday, January 8, 2015

Market Watch Op/Ed: The US Dollar on a 'Hurricane Path of Destruction'

At first glance at the headline above, you might think that this article is about how the US dollar is going to collapse in value as so many have been predicting. If so, you would be wrong. This Market Watch article is all about how the Fed is concerned that the US dollar is TOO STRONG. 

Where have we heard this before? If you answered Jim Rickards you got it right. He contends that the US dollar rally we have seen is an indication that the Fed is failing in its mission to get inflation and make debt easier to pay off. Below some quotes from this article and then a comment. Please click the link above to read the whole article.

"The U.S. dollar, at its highest level in nine years, is about to fall off its perch."

. . . . 

"Why is the dollar about to fall? Because that’s what the Federal Reserve wants since the strong dollar is starting to create problems in debt markets that hurt U.S. growth, McDonald maintains. The euro has fallen more than 14% versus the dollar since March."

"The underlying problem: Six years of cheap money, thanks to the Fed’s long-lasting zero-interest-rate policy, has put too much debt in the wrong hands. “When you leave interest rates at zero for six years, there is a price to pay,” McDonald says. Unless the Fed takes action and talks down the dollar, we may soon be paying the price, he argues."
"That’s because the strong dollar is pushing a lot of that debt closer to default, which is creating systemic risk. Widespread defaults would ultimately harm the U.S. economy by making investors overly cautious. “The Fed is extremely concerned about the dollar,” McDonald says. “The Fed has to do something to calm things down. The Dow could drop a thousand points if this gets out of hand. I think the Fed is going to have to talk the dollar down.”
. . . . . 
"Oil is down in part because the dollar is so strong, and by talking down the dollar, the Fed could put a bid under oil and help solve the problem, McDonald says."
"You see the same thing in emerging markets. With money so cheap — thanks again to the Fed’s zero-interest-rate policy — developing countries, and companies in those countries, naturally took out a lot of debt."
"The catch here is that they often borrowed in dollars. Now, bond investors are worried that the strong dollar makes it harder for those borrowers to pay back that dollar-denominated debt. That has investors getting out of this debt on worries about potential defaults. The selling has driven up yields to troubling levels, flashing a warning sign."
. . . . .
All of this is putting pressure on the Fed to talk the dollar down by suggesting publicly it’s concerned about dollar strength, and also that it might be more willing to delay scheduled rate hikes, which are partly responsible for dollar strength. “They must talk the dollar down. It’s on a hurricane path of destruction,” McDonald says.
When might the Fed do this? As soon as this week. Hints of Fed concerns about the dollar may appear in any of the following forums.
  • Wednesday’s 2 p.m. release of the Federal Open Market Committee (FOMC) minutes from its December meeting
  • A Wednesday speech by Federal Reserve Bank of Chicago President Charles Evans
  • Thursday speeches by Boston Fed President Eric Rosengren or Federal Reserve Bank of Minneapolis President Narayana Kocherlakota
  • A Friday speech by Richmond Federal Reserve President Jeffrey Lacker

Update from Bloomberg: Fed's Evans Says Raising Rates Too Early Would be a "Catastrophe"   That didn't take long, but the US dollar is still higher so far.

My added comment:

Truly strange times we live in. After years of forecasts about how the US dollar would collapse in value, it had a huge rally in 2014 instead. Most people assume that this was what Fed wanted in order to maintain confidence in the US dollar and discourage alternatives like precious metals and things like Bitcoin.

But Jim Rickards takes a completely different view. His contention is that the Fed did NOT want a strong dollar and has been trying in vain to get a weaker dollar (at a slow and steady pace). He thinks the dollar rally is evidence of failure by the Fed to get what it wants instead of a victory by the Fed. 

This MarketWatch article is saying much the same thing. It says the Fed is worried about the dollar strength and all the problems it is bringing to debtors who owe debt in US dollar based instruments. It says the Fed must take action to get the dollar down soon and even predicts they are about to do just that. 

Jim Rickards says if the Fed cannot get a weaker dollar they will just try harder until they do. This MarketWatch article agrees. I guess we will find out soon enough if they get one or not.

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