PDA

View Full Version : Dollar Drops to 19-Month Low Against Euro; Breaches $1.30 Level



EJ
11-24-06, 12:56 PM
Dollar Drops to 19-Month Low Against Euro; Breaches $1.30 Level (http://www.bloomberg.com/apps/news?pid=20601087&sid=aoYG2nTjseQk&refer=home)
November 24, 2006 (Bloomberg)

The dollar fell to its lowest in 19 months against the euro on speculation the Federal Reserve is done raising interest rates, while central banks in Europe will keep increasing them.

The U.S. currency extended its losses after breaching $1.30 against the euro for the first time since April 2005, a level where traders had placed automatic orders to sell the dollar. The European Central Bank has raised rates to an almost four-year high and President Jean-Claude Trichet on Nov. 20 said inflation remains a threat. The Fed has left rates unchanged since August.

"The break of 1.30 is a strong signal that the dollar has to weaken," said Carsten Fritsch, a currency strategist at Commerzbank AG in Frankfurt. "The sentiment for the dollar is negative. In the euro-zone, growth will remain strong."

AntiSpin: Over the centuries, monetary systems have come and gone–such as the international fractional gold reserve system that ended in 1971. There is a pattern of events leading up to these transitions. The typical scenario for a transition from one monetary system to another is as follows.

The old system is organized around the ability of the main players in the system to produce internationally valued real-goods output for export and capital goods used as reserves at little or not cost. Imbalances build up in the system because the ability of economies in it to produce goods for export to earn foreign exchange revenues, relative to capital goods for export, changes over time. The main players in the system are not motivated to re-organize the system to accommodate these imbalances because the transition costs from the old system to a new system are higher than the apparent benefit, and the political costs tend to be highest for the largest player in the system. The largest player and the others are motivated to work for many years to find ways to sustain the old system in a state of imbalance.

In the current instance, the most likely system to arise from the current unilateral US dollar based system is a multi-lateral dollar-euro-yen reserve system. Getting there from a unilateral dollar based system to a multi-lateral dollar-euro-yen system minimally requires that the EU develop a euro bond market nearly as liquid and transparent as the dollar bond market, and that the EU change trade policies 180 degrees to begin running trade deficits. These two requirements alone are significant transition cost barriers to a planned transition. As a result, the US, Asia and the EU continue to make concessions to maintain the system as it grows further out of balance over time. The investments and changes in mindset and practice required to create a new system have only happened in the past as a response to a systemic monetary crisis.

The typical life span of an international monetary system is 30 to 50 years. An unbalanced system can continue for many years, until one day an event that is mundane under circumstances of greater global balance causes one of the major players in the system to calculate that the cost of breaking from the others and absorbing the transition costs of moving to a new system is lower than either staying with the old one or waiting until the inevitable crisis occurs. This is how the fractional gold reserve system ended, when Charles de Gaulle in the late 1960s demanded re-payment of gold owed to France by the US, after he decided that the US–then running what was considered a large trade deficit–intended to depreciate the dollar and pay its trading partners back with cheap dollars. Nixon responded by taking the US off the fractional gold standard and defaulting on US debts in 1971, just as de Gaulle had feared. Nixon also devalued the dollar not just once, but twice, later that same decade. A more principled US President might have heeded the advice of economic adviser Milton Friedman and not have done any of these things. Which brings me to the main point here: the outcome of global imbalances is primarily determined by national leadership–who the leaders are in the system and how they are likely to behave in a crisis.

Charles de Gaulle had accurately sized-up Nixon, but sometimes miscalculation precipitates crisis, such as when the US attempted to bale out Great Britain in the late 1920s to try to preserve the international gold standard based monetary system. The question today is, how do China's President Hu Jintao and Japan's Pre Prime Minister Shinzo Abe think about Bush? If the dollar and the US economy came under duress because of trade balances, can Bush be expected to act unilaterally or internationally? If the other main players calculate that a unilateral response is likely, then they may be motivated to jump the gun, as de Gaulle did. Alternatively, a player at the periphery of the system with international aspirations and strained political ties with the US, such as Russia, may form a block to threaten to break with the system, and either receives political and economic concessions within the context of the system or forces a fundamental change in the system.

We keep a close eye on Russian-U.S. relations as well as China-U.S., then, as that is at least for now the hot spot for a international monetary crisis.

_____

[/URL] For guidance on how to play the coming currency corrections, see "[URL="http://www.isecureonline.com/reports/CRC/WCRCGA16/"]Crooks on Currencies (http://www.assoc-amazon.com/e/ir?t=wwwitulipcom-20&l=as2&o=1&a=047175367X)"
To buy and trade gold easily and inexpensively, see BullionVault (http://www.bullionvault.com/from/itulip)
To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List (http://ui.constantcontact.com/d.jsp?m=1101238839116&p=oi)

Copyright © iTulip, Inc. 1998 - 2006 All Rights Reserved

All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/forums/../GeneralDisclaimer.htm)

bart
11-24-06, 01:10 PM
An update on some of my predictions, it appears we're in the process of challenging .80 on the dollar index:


http://www.nowandfutures.com/images/predict_usdx.png

http://www.nowandfutures.com/images/predict_gold.png

http://www.nowandfutures.com/images/predict_silver.png

Charles Mackay
11-25-06, 09:45 AM
We can scramble around trying to avoid the weakest fiats or we can just stay in gold until the transition to another reserve currency is over. So far, Gold, Silver, and commodities are outperforming them all.

I guess at some point a dollar crash would reduce world purchasing power to such an extent that a depression will ensue.. but which currency would survive that is still an unknown. Jim Rogers for instance doesn't think the Euro will be around in 15 years. Maybe the Yuan or some form of Asian Currency block will be in place to transition to at that point.

EJ
11-25-06, 04:05 PM
We can scramble around trying to avoid the weakest fiats or we can just stay in gold until the transition to another reserve currency is over. So far, Gold, Silver, and commodities are outperforming them all.

I guess at some point a dollar crash would reduce world purchasing power to such an extent that a depression will ensue.. but which currency would survive that is still an unknown. Jim Rogers for instance doesn't think the Euro will be around in 15 years. Maybe the Yuan or some form of Asian Currency block will be in place to transition to at that point.

Major reserve currency system transitions are rarely short and never pretty, e.g., 1929 - 1945 (16 years) and 1971 - 1983 (fractional gold to floating exchange, fiat dollar-centric, 12 years). The transition to a new reserve currency regime is a win-win for commodities and gold. Whatever major central banks do to try to maintain the status quo, such as by printing euros to buy dollars, as Russia and other countries move out of dollars, is good for gold. The eventual failure of these efforts will be good for gold. Creation of a multi-lateral dollar-euro-yen based reserve system–the current dream of global central banks–is daunting: the EU needs a euro bond market as liquid as the yen and dollar bond markets and EU countries need to run trade deficits. Now there is no euro bond market, only national bonds issued in euros, thus Rogers' pessimism about the euro; and trade deficits are politically impossible for most EU members.

Charles Mackay
11-25-06, 04:45 PM
Major reserve currency system transitions are rarely short and never pretty, e.g., 1929 - 1945 (16 years) and 1971 - 1983 (fractional gold to floating exchange, fiat dollar-centric, 12 years). The transition to a new reserve currency regime is a win-win for commodities and gold. Whatever major central banks do to try to maintain the status quo, such as by printing euros to buy dollars, as Russia and other countries move out of dollars, is good for gold. The eventual failure of these efforts will be good for gold. Creation of a multi-lateral dollar-euro-yen based reserve system–the current dream of global central banks–is daunting: the EU needs a euro bond market as liquid as the yen and dollar bond markets and EU countries need to run trade deficits. Now there is no euro bond market, only national bonds issued in euros, thus Rogers' pessimism about the euro; and trade deficits are politically impossible for most EU members.
If we count the beginning of this new reserve currency transition as 2001 (which represents a nice fibonacci 21 year completion of the previous market cyle that started in 1980) ...and then if we count the first 1 and 2 legs of this transition as being complete in 2006 (another nice fibonacci 5 years). Maybe we'll get lucky and legs 3 thru 5 will last another 8 years, completing in 2014 or so. "Lucky" as in predictable...not as in consequences.

Enjoyed EJ's telephone interview with Puplava this morning!

bart
11-25-06, 04:58 PM
Yet another chart, this time showing the period during which the British pound lost reserve currency status. I've overlaid the dollar on it, offset by 57 years.

http://www.nowandfutures.com/download/pound_usdx_lag1910-1985.png

Charles Mackay
11-26-06, 12:53 AM
nice work Bart... after 80 is violated on the USX I wonder if we'll get that 18 year reprieve like they got from 1950-1968 or so... doubt it.

bart
11-26-06, 01:32 AM
nice work Bart... after 80 is violated on the USX I wonder if we'll get that 18 year reprieve like they got from 1950-1968 or so... doubt it.


Thanks and good question... and my crystal ball isn't up to the task.

Do keep in mind that the period of stability was mostly due to the Bretton Woods agreement and the size of the US gold reserve. In the unlikely event something similar does actually happen along those lines, ala a 'super basket of currencies' as the world reserve currency with perhaps some nods to gold, it is possible.

jk
11-26-06, 07:43 AM
Do keep in mind that the period of stability was mostly due to the Bretton Woods agreement and the size of the US gold reserve.

1950 to 1968 was a period of u.s. domination of the first world, and a political/military standoff between the u.s and u.s.s.r which was in many ways a stabilizing force. we are now in the early innings of a period in which a formerly-triumphal sole-super-power u.s. is being reduced to one of several power centers in a multi-polar world. so we went from bretton woods i, in which other currencies were fixed to the dollar and the dollar was fixed to gold, to "bretton woods ii" with floating currencies, many of which are informally pegged to a fiat dollar. what we are looking at dead ahead, i think, is a period of currency confusion.

akrowne
11-26-06, 11:24 AM
Is there any credible evidence that the euro is breaking down? The eurozone economy just seems to be doing better and better. It looks to me like a multi-country currency, even if fiat, is more stable than the single country version: it has both the scale to encompass a large amount of economic activity, and the competing national interests to provide transparency and a check on management.

Bless Rogers' heart for being a hard-money supporter, but I think the euro has the legs to run for quite a while. In fact I expect to see more regional currency zones.

Not that gold won't see an enormous spike if the dollar slips sharply, mind you...

jk
11-26-06, 12:20 PM
re: the euro's durability---

i think the argument against the euro is that the diverse financial positions of the member countries and the lack of real labor mobility will produce intolerable political strains if and when there is real economic hardship. so, e.g. italy would really like to devalue but they can't and, under current circumstances, they won't. now imagine those circumstances get significantly worse....

i think there's a non-zero probability of this outcome. i'm trying to think of the odds i'd want, and the time period to cover, to make me willing to bet on this outcome.....

i think i'd want 5 to 1 and about 12-15 years.

bart
11-26-06, 01:31 PM
Speaking of the Euro, I just added some charts that have previously been private for the European Central Bank to my central bank watch (http://www.NowAndFutures.com/cb_watch.html) page.

Two of them are quite interesting - they show ECB gold buys & sells since 1999, short & longer term. The data runs about 4 weeks behind though, so its not useful for trading.
I'd say their "timing" hasn't exactly been poor:


http://www.nowandfutures.com/images/ecb_weekly_gold_long_term.png



http://www.nowandfutures.com/images/ecb_weekly_gold.png

jk
11-26-06, 04:14 PM
bart, any clues as to whether they are holding the physical metal or have lent it to gold banks?

bart
11-26-06, 04:30 PM
bart, any clues as to whether they are holding the physical metal or have lent it to gold banks?

Not enough to write home about, but my gut hunch is that at least 1/2 is in physicals mostly due to ECB bankers being historically more conservative. I vaguely recall something in the Maastricht agreement about physicals too.

WDCRob
11-26-06, 05:54 PM
Bart is it possible the ECB's activities are moving the market? It looks too perfect. Or am I missing the boat entirely?

bart
11-26-06, 06:12 PM
Bart is it possible the ECB's activities are moving the market? It looks too perfect. Or am I missing the boat entirely?

No question that they're a huge factor and have moved the market at times, and I think its safe to say that that's an understatement.

There are changes of +/- 2,000 tonnes in short periods and one tonne is about 32,000 troy ounces, which translates to about 64 million ounce buys & sells...

jk
11-26-06, 06:57 PM
No question that they're a huge factor and have moved the market at times, and I think its safe to say that that's an understatement.

There are changes of +/- 2,000 tonnes in short periods and one tonne is about 32,000 troy ounces, which translates to about 64 million ounce buys & sells...
it looks like they're trading not taking long term positions. or possibly they are gradually selling, as it seems there is a trend to lower holdings. it seems odd to me, though, that the ecb would be trading so much gold. i thought that the money market interventions of cb's were always more than adequate to generate profits. i also have the impression of the ecb as a conservative institution, but those moves make it look like a hedge fund throwing its market weight around.

i also note that the charts say holdings "including receivables." do you suppose the receivables are gold loans? if not, what else?

bart
11-26-06, 09:15 PM
it looks like they're trading not taking long term positions. or possibly they are gradually selling, as it seems there is a trend to lower holdings. it seems odd to me, though, that the ecb would be trading so much gold. i thought that the money market interventions of cb's were always more than adequate to generate profits. i also have the impression of the ecb as a conservative institution, but those moves make it look like a hedge fund throwing its market weight around.

i also note that the charts say holdings "including receivables." do you suppose the receivables are gold loans? if not, what else?


They're unofficially committed to selling their portion of the 500 tonne share of the Washington Agreement which has been about 100 tonnes per year if memory serves, and of course do make noise about the "barbarous relic"... but their actions sure do speak very loudly.

As you can imagine too, I'm carefully avoiding the "C" word (cartel, cabal or conspiracy) since this is data I've never seen anywhere else and don't want to unnecessarily color the "situation".

More sort of original research from the bat cave of bart... ;)

As far as the receivables, it could be loans or leases or swaps or even just "normal" dealings where the physical gold is not actually moved to the ECB's vaults.

jk
11-27-06, 11:13 AM
They're unofficially committed to selling their portion of the 500 tonne share of the Washington Agreement which has been about 100 tonnes per year if memory serves, and of course do make noise about the "barbarous relic"... but their actions sure do speak very loudly.

As you can imagine too, I'm carefully avoiding the "C" word (cartel, cabal or conspiracy) since this is data I've never seen anywhere else and don't want to unnecessarily color the "situation".

More sort of original research from the bat cave of bart... ;)

As far as the receivables, it could be loans or leases or swaps or even just "normal" dealings where the physical gold is not actually moved to the ECB's vaults.
there sure is something odd in those numbers. i wouldn't expect the sale of their portion of the 500 tons of net sales allocated to consist of 2 month swings in inventory of up to 2000 tons up or down.

i just realized what that chart reminded me of. it looks like a graph of the commercials' position in the cot report, selling the peaks and buying the valleys.

bart
11-27-06, 11:50 AM
there sure is something odd in those numbers. i wouldn't expect the sale of their portion of the 500 tons of net sales allocated to consist of 2 month swings in inventory of up to 2000 tons up or down.

i just realized what that chart reminded me of. it looks like a graph of the commercials' position in the cot report, selling the peaks and buying the valleys.


I'm not sure what to say - the Washington Agreement sales are only a small portion of the ECB's overall gold trading operations. They're two very different operations, but in the same market. I've known for quite a while that the ECB was a very large factor in the gold market much like various European banks in the '70s were, and the chart (with their own data) sure is a nice confirmation.

Good observation on the COT commercials chart similarities - no question of generally how successful that approach is.