After the 2008 global financial crisis, we got the response from the US Fed. That response was the easiest money policy in US history with zero interest rates and several rounds of money creation known as QE. Many were predicting all this money creation would lead to a collapse of the value of the US dollar. Instead, recently the US dollar has staged a strong rally as this CNBC article notes.
So, what happened? Why didn't the US dollar lose value as so many were predicting? Does this mean they are wrong and the US dollar will only continue to rise? Let's look at it. First some quotes from the CNBC article, then a few comments.
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"It's been a remarkable run for the dollar.
In the scope of eight months, the dollar index has shot up more than 19 percent against other currencies, after going nowhere for almost 10 years."
. . . .
"In the last 12 months alone, it's appreciated more than 21 percent against Norwegian and Swedish currencies; more than 17 percent against the euro and more than 13.5 percent against the yen.
So now what? The strong dollar story has not changed, and many pros will tell you the currency has further to climb."
"The fundamental drivers of the dollar rally are still in place: better U.S. economic growth and a looming policy shift toward higher interest rates, at the same time that other countries are still languishing, facing deflationary threats and pumping easy monetary policy like quantitative easing into their economies to fight it."
. . . .
"To be sure, some dollar doubters may point to still sluggish wage growth and overall weak headline inflation figures that recently turned negative, to keep the Fed—and the dollar rally—on hold."
"Another concern for dollar bulls is the recent slowdown in the pace of economic growth compared with a burst of momentum late last year. A string of recent data points—from gross domestic product to the Chicago purchasing managers index to pending home sales have disappointed."
. . . .
"For the currency market, a world in which the Fed is tilting toward tighter policy, that "happy" policy sends a clear sell signal for currencies whose central banks are easing. That's one reason why traders are currently holding bullish long futures positions on the dollar against all major currencies, according to weekly CFTC futures data."
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My added comments:
There really is no great mystery as to why the US dollar has been rallying when many expected it to fall in value. As this CNBC article points out, it is simply the best alternative out there in a world where everyone else is fighting deflation and using currency wars to devalue their own currencies as part of the fight. The US dollar gets a pass for now because the global perception is that the US is in at least a mild recovery (though the data is mixed). Combine that with the expectation that the Fed will raise rates later this year and the dollar wins somewhat by default.
By no means does this mean the longer term prospects for the US dollar have changed. It just means that, for now, it's the dollar's turn to show some strength while all other currencies fight it out to devalue. All it may to change the trend is for the fairly weak US recovery to stall and/or the Fed to put off raising rates longer than expected. If the US recovery actually ends and the US starts back into recession, you can expect the FED will not only limit any interest rate increases, it may even go back to another round of QE.
This game is far from over (it will play out over years) and we can expect currencies to bounce up and down with more and more volatility because the underlying economic issues (too much debt and too much leverage in the system) have not been solved in any way. This just causes the currency fluctuations to bounce around the world here and there. At some point, the US dollar will take its turn back into weakness. Until then, don't be surprised if the more recent trend of both the US dollar and gold showing some strength continues. Those around the world who are seeing their currencies lose value will likely move capital into US dollars and gold supporting both. Gold has actually held up well against the US dollar despite its big rally in recent years. Notice that in Europe, Japan, and Canada, gold has moved up right along side the US dollar in those currencies.
Of course, if we some day get "the big one" that Jim Rickards is forecasting, the entire system will come under severe stress. All fiat currencies will come under pressure including the US dollar. That would set the stage for a global monetary conference to reset things. That is when gold would come back into play one way or another (not necessarily a gold standard). In a global reset, those with the most gold will get the best deal in the new system regardless of what currency is used.
That is what this blog is following and will continue to follow until the underlying issues (too much debt and too much leverage in the system) get resolved. It could happen quickly in a crisis or over many years at a slow and steady pace. We listed four plausible future scenarios in this article. We'll see how it all turns out.
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