Update below (Tues. morning), with chart.
Like Nikki Finke always says whenever a scoop of hers gets confirmed: TOLDJA!!
|Picture of my girlfriend
and the fish I caught. Honest!
A couple of weeks ago, I wrote that
we were about to enter a crucial phase for the dollar. Then last Thursday, I wrote that
the dollar was about to break through a key support level on Thursday or Friday.
And what happened on Friday? Even after massive Federal Reserve, European Central Bank and Bank of Japan intervention on Thursday night? The dollar broke through!
I was right!—TOLDJA!!
(Yes, I know: I’m an insufferable shit. But I’m also right. So you’ll just have to resign yourself to taking the good with the obnoxious.)
Now it’s all good and fine to have predicted when the dollar was going to break through a key support level—but the obvious question is:
Will the dollar continue going down? Will it bounce back up? Roll sideways? What? (“You want answers?” “I want the truth!” “You can’t handle the truth!”)
The intervention last Thursday night (Friday morning in Japan) was so as to bring the yen down: Following the Sendai Earthquake, there was the expectation that Japanese companies will repatriate foreign excedents and buy up yens, in order to rebuild. So the markets started buying up yens in anticipation of this sea-change, pushing the currency down to ¥78.50 to the U.S. dollar.
The BoJ—rightly—decided to inject liquidity, so as to stabilize the yen. As a responsible central bank, you cannot have your currency getting strong right in the middle of a catastrophe like Sendai.
So after the coordinated efforts of the BoJ, the ECB and the Fed, the yen bounced back up to ¥81 to the dollar—
—but the dollar didn’t strengthen against other currencies. In fact it weakened. The euro crossed the psychologically important $1.40 level, and just kept on going; as I write this (1:14pm EST), it’s at $1.4199—and rising. The dollar is weaker against all other currencies. And gold and silver? Up—with a vengeance.
Now, what will this continued dollar weakness mean to the Federal Reserve and to the Treasury department?
A falling dollar means rising interest rates—but neither the Treasury nor the Fed want that, for vastly different reasons.
The Federal Reserve doesn’t want higher interest rates because Benny and The Tools are convinced that low interest rates are the only way to kickstart the economy.
They are wearing peculiar blinders: They are convinced that the only way forward for the American economy is to return to the status quo ante the 2008 Global Financial Crisis. Ben Bernanke and the Fed Drones do not seem to understand that the massive debt bubble created by the Shadow Banking sector popped for good in 2008—and it ain’t never coming back.
Benny and the Fed Fools don’t see this. All they see is that they have-to-have-to-have-to pump-pump-pump more money into the system. They don’t realize that what they’re doing is pumping more heroin into a junkie who’s already OD’ed.
The Treasury, on the other hand, is desperate to keep interest rates low so that it can continue funding the Federal government’s cataclysmic debt.
See, if rates rise to what they ought to be—considering how weak the dollar is—then the Treasury would be unable to fund the Federal government’s $1.6 trillion deficit.
It’s already having a hard time funding that massive deficit—even though the Federal Reserve by way of QE-2 is buying up roughly half of it. Do recall (for those who might have forgotten), the Fed is buying up $600 billion in Treasury bonds, via QE-2. “Buying up $600 billion”? Excuse me, I misspoke: Printing $600 billion, out of thin air.
If QE-2 ends in June like it’s supposed to, and interest rates rise in the face of a weakened dollar, what do you think Timothy Geithner will be looking at? He’ll have to issue Treasury debt for the trillion-plus fiscal year 2012 deficit, and additional Treasury debt for the interest on the FY 2012 deficit—and then even more Treasury debt to cover the interest on the interest!
Tiny Timmy’s pin-head would explode into a million pieces, if interest rates were to rise.
Benny and the Eccles Jackals are not unsympathetic to Tiny Timmy’s plight. But it’s not enough for the Federal Reserve to decree (via the Fed Funds Rate) that interest rates will not rise, in the face of rising Treasury yields. The Fed—in order to keep those yields low—has to do something. Something, in order to keep the Federal government funded.
Therefore, here is another one of GL’s Fearless Predictions™:
Once Quantitative Easing-2 ends this coming June, the Treasury bond purchases will be extended indefinitely—call it QE-3. The amount of each month’s purchase of Treasury bonds by the Federal Reserve will be at least $75 billion—but don’t be surprised if it’s as high as $100 billion to $125 billion. Per month.
This is the only way that the Federal Reserve and the Treasury department will be able to achieve their contradictory objectives of fully funding the Federal government’s debt, and maintaining low interest rates in order to “stimulate lending”.
So to answer the question, How low will the dollar go?
This go-around? I don’t know, but in the near-term I’d guess 73.5 on the dollar index, the euro topping out at $1.47, the yen to ¥77.50, gold to $1,450, silver $39 maybe. Maybe in the next three to four weeks, but perhaps even sooner.
In the long term? If the clowns running the circus remain in place, my guess is the dollar will soon enough hit The Big Bagel.
That is: Zero.
Update (Tues. morning): So here’s the three-year dollar chart I’ve been obsessing over in previous posts (here and here), updated as of last night:
As I write this (7:03am EST), the dollar index has broken down to 75.267—and it’s clearly heading lower.
I cannot emphasize this enough: This moment will be looked upon as the turning point in the dollar. From here on out, it’s all monetization, all the way to the end—the Fed has essentially tattooed “QE ‘til I die!” across his chest.
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