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Peculiar prospects for the US$

Background

Brexit has been one of the most positive events in the world for a long time, and regretfully, the opportunity has been lost. The world is in ‘stagflation’ and the remedy, as at the beginning of the 1970’s, is to:

  • Increase interest rates to re-establish the concept of ‘saving’ which in turn will generate demand to start growing economies again;
  • Increase privatisation and reduce the involvement of central government;
  • Reduce tax rates to generate growth via increased investment;

This is the opposite of what the EU is doing, and was the opportunity for Britain in leaving the EU: It is the ‘medicine’ you need to take to re-energise economies for growth, but it is politically untenable and what the world is not doing. In Britain the opportunity was even greater because there is no political opposition to the Conservatives at the moment with Labour in tatters and seemingly intent on further self-destruction. More countries are likely to exit the EU.

But, sadly, the UK has ignored this path and chosen to introduce stimulus and reduce interest rates. It too will now join the rest of the first world in building debt via QE and keeping it’s growth rate anaemic. This is all in line with the original ‘Reaganomics’ policies in the US which was the original start of the problems the world faces today, and which still needs to be addressed.

It is this extended process of endless and unsuccessful easing and stimulus that has eroded confidence in the international monetary system and the central bank operations which has left all currencies significantly overvalued. This is essentially the driving force of the current bull market in Gold, which will reduce inflated currencies toward their real core values.

The US$

US Dollar value is the result of many impacting factors, which could be distilled down to a manageable few in order to try and attempt understanding where Dollar value might potentially drift in the period ahead.

As with most things financial the US$ direction will essentially be determined by 3 broad impact factors in Supply and demand, Human emotion, and Technical analysis.

These factors plus all the competing external factors, such as the health (or otherwise) of trading nations and their respective currency values, provide clues to the actual and potential value of the US$. But it can only remain clues and never be objective nor accurate.

The main driving force will mostly always remain the inverse relationship the US$ has with other currencies and the gold price.

The US$ is traded against all world currencies but is valued mostly by performance against it’s largest trading partners and their respective currencies. This is reflected in the US Dollar Index which consists of the largest 6, including:

  • Euro 57.6%;
  • Japanese Yen 13.6%;
  • UK Pound 11.9%;
  • Canadian Dollar 9.1%;
  • Swedish Krone 4.2%;
  • Swiss Franc 3.6%;

The US Dollar Index started in 1973 at a base value of 100 and it’s performance since is illustrated in the chart below.

USDsmall

The index enjoyed peaks in Jan 1985, Jul 2001, and Jan 2015 in a steadily declining trend, but has more recently recovered from low points in Feb 2008 and Mar 2011 in a steadily rising trend during the last 8 years. This last 8 year period has also seen a steady decline in the Euro vs US$ currency pair, illustrated in the chart below.

Eurusdsmall

The Euro constitutes 57.6% of the US$ Index and therefore the two correlate inversely, with the Euro being the primary force propelling the US$. This strongly suggests further upward moves in the US$ and downward moves in the Euro, especially when you additionally consider the travails in the EU:

  • The EU is on a path to eventual collapse;
  • More countries will follow Britain in leaving the EU;
  • A banking crisis is developing;
  • Stagflation is coming, if not here already;
  • Migration crisis plus increasing terrorism;
  • The EU plus Japan constitute 99% of the world’s QE at the moment;
  • Plus all the travails of central bank mismanagement resulting in:
    • Low to negative interest rates;
    • Anaemic economic growth;
    • Plus many others;

This will of course lead to the eventual collapse of the Euro and a massive increase in the value of the Dollar with a flood of Euros into the US$.

 

Conclusion

 

All currencies are over-valued after the lengthiest period of monetary easing in history which continues unabated in central bank activity which is not working. Confidence in the international monetary system is eroding as economic recovery remains elusive in low growth rates, high debt levels, and low interest rates, and this is the primary cause of the new bull market in gold. Stock market indices worldwide exhibit massive extended top patterns and the bond markets are at historic low yields, all threatening impending collapse.

In the next indefinite period in this environment:

  • Currency values including US$ will be reduced from their inflated levels down toward their true core values;
  • Events in the EU will cause massive reduction in the value of the Euro and increase in the value of the US Dollar;
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