The overseas wars being fought have accelerated inflation; the United States is running not just a balance of payments deficit but also a trade deficit. Overseas holders of the dollar and U.S. debt have lost faith in the U.S. ability to cut its budget and trade deficits.
More and more dollars are being printed and then sent overseas, to pay for the nation's military expenditures and private investments. Huge amounts of assets have fled the United States.
Because of the excessive printing of paper dollars, and the negative balance of U.S. trade, other nations are increasingly demanding fulfillment of America's promise to pay. That is, they are demanding assurances from the U.S. in exchange for their paper dollars.
Sound familiar? It is not a current headline; 1971 was the time.
The Nixon Shock, (not Watergate but the other one), came soon after as the gold standard was dropped, currencies were re-valued and things were forced to move on. The U.S. mortgaged future GDP numbers, drew the cash out, paid some debt down, and started the monthly payments. However, most mortgages run between 15 and 30 years, this one is thirty eight years old and unfortunately no capital has been reduced, the principle sum is still owed (negative current account and budget deficits), and the monthly repayments are impeding the ability of planning for a rainy day.
The U.S. economy is living pay-check to pay-check and its global credit rating has been threatened with downgrades said TheLFB-Forex.com Trade Team members. In real terms the U.S. would be hard pushed to qualify for a car loan, let alone a 1971 style re-mortgage. The kicker is that neither would most economic regions at the moment, however, most are not swathed in unthinkable amounts of forward debt commitments.
Be that as it may, the Fed is auctioning more debt between now and September, writing out some more Taxpayer Mortgages for 10 and 30 years (Treasury Notes) in an effort to raise some capital and make the next month’s mortgage payment. There was $7b of debt bought by the Fed on Tuesday alone, in their efforts to rally those who may be wondering what value a 0% interest bearing note really is worth if equity markets find buyers thay said. Please do not think about where the money comes from to pay it all back, that will be somebody else’s issue to deal with, and without Money Supply numbers, and with Fractional Banking in place, who knows how many notes are actually out there, when they will be asked to 'Pay the Bearer', and how much is actually held in reserve to cover the liability.
The dollar gets stronger in the short term as holders of the existing debt support the new loans to the U.S., all in an effort to feed the monster that has been created. The dollar is worth 85% of its value from the Nixon Shock (that is what the dollar index reflects), and is holding at that level. Will it, should it, and could it drop lower is an open debate, and one that is answered by the fact that if the overseas investors bail now, they devalue what they already own. A tough call, but at the moment, the U.S. dollar is showing that there is interest in owning it, and for whatever reason you choose to believe, the market sentiment is supporting the mind-set that a U.S. consumer re-loaded with more debt than they can afford is the way to kick-start the global economy. Without America consuming, and without masses of new debt printed, the global expansion cycle goes on hold.
The real test of that strength comes at 89.00 on the index; it is at that level that sellers of the greenback stepped in previously the Trade Tam said. If it gets through this test maybe the herd will buy into the little dollar bull, but if it fails we will watch once more as the little bull morphs into baby Bambi, because once the global economy prints expansion via positive GDP numbers the Usd will get sold. A expansion from the trough phase of the global business cycle starts with dollar debt flooding the market, that frees up liquidity, and forces financial institutions into the open market. But once moving, the global markets will then question the strength of the dollar, and serious valuation questions will come in regard to the sheer amount of dollar in the market at one time.
The market fundamentals reflect that the buying may hold, but sticking to the four hour support and resistance charts, they will reflect very well where the market is willing to take things. The next break may be to the short side of the dollar index, it may not be today, nor next week, but the fickleness of the market may soon turn into a run on a bloated Usd.