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Warning: Beware of the U.S. Dollar’s “Strengthening” Rally

May 8, 2008

I’m a little late this morning submitting my contribution to this blog because I had to work through a bunch of headshaking information that came from the financial markets. Why is this of any importance to a travel search site? Because the little island of St.Maarten/St.Martin is uniquely qualified to the world’s 2 major currencies: the Euro and the US dollar (the fixed pegging instrument for the Antillean Guilder). I cannot recall any place in the world where shifts and changes between these 2 currencies are so evident and with impact on everyday life. So beware, that the bankers (including the Federal Reserve) are playing headgames ith us.

Don’t mistake the U.S. dollar’s recent rally for strength. If anything, it’s a head fake of legendary proportions. In fact, the dollar’s recent run-up is actually a warning that risks are escalating, which is secretly confirmed by the fact that interest rates the banks charge each other is rising (check out LIBOR on wikipedia). They simply don’t trust eachother’s balance sheets any longer! The US dollar is rallying on escalating risk, nothing else.

To better understand what I mean here, let’s look at the greenback’s recent performance against the euro. After bottoming at an all-time low of $1.6019 versus the euro on April 22, the dollar has soared nearly 4% and was trading at $1.5428 per euro early yesterday (Wednesday May 7).

Now many of the Wall Street types expect that rally to continue. Just yesterday, UBS AG (UBS) predicted the greenback would rise to  $1.47 in three months. That would be a jump of 5.0% from where the dollar is trading now, and would represent a total rebound of about 8.0%.

I mention this forecast because UBS is the world’s second-biggest currency trader, meaning the Swiss banking giant’s projection is certain to get lots of airplay.

Here’s my advice on this forecast: Ignore it. It will never happen that AND GOLD AND OIL SHARPLY INCREASE, AND THE DOLLAR DOES TOO. IMPOSSIBLE.

They are playing headgames with us, while the zero % Interest Bait is Just Around the Corner.We are living in perilous financial and economic times. Yet very few people are even paying attention. All it takes to re-start an economy is to hand out cheap money…right?

As you likely know, the government has embarked on a major bailout course.  So far, so bad. I think the boys at Buck’s-r-Us (Federal Reserve) have been hitting the peyote. Their motto is that everything can be patched up by simply issuing more tonnages of green paper, called dollars.

In comparison, it wasn’t too long ago that Japan’s bubble burst from their 1980’s excesses. Remember when fear was rampant that the rich Japanese were going to buy up the world? Remember when their real estate was chokingly overpriced? Quite predictably, the Bank of Japan responded to the bust by lowering interest rates in the early 1990’s. Much of this decade they have held the interest rate at 0%!!

Deflation tends to scare the fully loaded crap out of central planners. Even negative interest rates are possible. The motto is “please borrow and spend!” Otherwise, the whole system gets flushed.
This didn’t sit too well with traditional Japanese. They are thrifty savers. They tend to function just fine without Suburbans, spa treatments and vacation homes. You can make cheap or free money available but someone has to accept the loan. The Japanese didn’t take the bait.

A two-decade long deflation was the result. The Bank of Japan was completely impotent in their attempts to re-inflate and get the Japanese economy back on track.

And now it’s the US’s turn to stave off deflation. Sequential bubbles of tech stocks in 2001 and real estate currently have seriously damaged the economy. By the way, the Fed caused these bubbles in the first place. They are now attempting to create a new credit expansion. After all they are a one trick pony. There are no dollar rescuing rate increases in sight.

US interest rates are now trending towards zippo. Is a 0% Fed Funds rate in the cards? I wouldn’t rule it out. Speculators are frothing at the mouth in anticipation of free funding.
Low interest rates are not what wring out excesses. Low interest rates are designed to keep the Wall Street financial orgy going. Party on!

Will Americans take the low interest rate bait?
“Oh, hell yes, Baby, bring em on! You talkin’ free money? That’s a good thang, no?”
The US culture is saturated with the motive of instant gratification. Don’t expect many to turn up their noses at the Fed’s desperate offers. We will borrow and we will spend. There will be no lost decades around here. In fact, I predict that a major trend will take place in the US real estate market in the coming decade. The reverse mortgage phenomenon will become a craze. My fellow Baby Boomers will try to time their last breaths with their last home dividends. Is Doc Kervorkian still in business to make sure there is no discrepancy here? Buy now, pay later. What a concept! As an economist I crinch, as an ardent reader of Kurt Vonnegut and Mark Twain I would say: Let’s party, because that seems to be the only good explanation why we walk around on this earth.

Written by stringdude · Filed Under News 

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