Currencies Summary
The US Dollar turned from Fib support and is on Neutral since Mar 18, 08 from our Sell the Rallies since Feb 28, 08. Since 2001 the USD is mirroring the 80's decline, and election optimisim may turn the USD around near the early 2008 cycle low. The recent decline in US Rates is not supportive of the dollar, but is happening near a 7 year cycle in the Rates vs Gold (Inflation) chart and warning that the USD could take a pause in its decline for a year or two as the world watches the new administration.
The US Dollar is declining due to Debt inflation of 8%
Since the 1970's the amount of US Debt backed by the dollar has increased at a rate of 8% per year, while the dollar has declined at a rate of 3.5% per annum. Half of this debt is owned by the Fed and US itself for its pension liabilities, the remaining half is owned about equally by Americans and Foreigners. There are now over 4 trillion in global USD reserves and more than two thirds are in Asia. When these reserves start to flow into other assets like resources, they will cause price increases where they flow, and downward pressure on the USD and its debt. The Currencies of countries with a major surplus like China, Japan, Germany and Russia will appreciate over time, especially the ones with large USD reserves like Asia and Russia.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Rates and Inflation can also affect the US Dollar
Higher Rates in major economies support their Currencies by attracting Capital with their low Bond price and high Rates of return. We can see in the relative strength of major Currencies below that higher Policy Rates tend to strengthen the Currency, but this has not and is not likely to work for the US because of the rate of issuance of Debt. Dollars and Bonds are not a good place to be when Inflation rises, and Gold or Oil are good measuring sticks of the Rate of Inflation. By charting Rates vs Gold for Inflation below we can get a good idea of the positive vs negative influences on the USD. We can see that Rates and Inflation do affect the USD but are not the only factor, and by this Ratio the USD is about where we would expect it to be.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Japan's low rate policy has made the Yen the weakest major Currency of the last decade
This July the Bank of Japan raised Rates for the first time in 6 years and may have signaled the end of the Yen's weakness for a while. Each wave down in 1998, 2002 and 2005 has been on lower momentum while the waves up to 100 have been stronger possibly forming a bullish ascending triangle targeting the highs near 120 or higher. However the Yen has made 2 false starts and must now rise quickly or a face a seriously bearish break of the 25 year uptrend line near 80.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
The US policy has made the Canadian dollar the strongest major Currency of the decade
The Inflation caused by the large issuance of US Treasuries and dollars has led to a boom in Commodities related Currencies like the Canadian and Australian dollars. Also, since 2001 the US relations with Arab countries are difficult, and it is logical for them to move their funds to more comfortable countries like Canada, Britain and European countries. Canada has been the biggest winner because of it proximity and similarity with the US, as well as its Oil and Mining businesses. By looking at the last 150 years we can see the Canadian dollar losing 60% to the Pound until the mid 1980's and 40% to the USD until 2001. Since then the Canadian dollar has regained all its losses against the US dollar and almost half its losses against the Pound. Until the boom in Commodities shows serious signs of trouble, and the US relations with Arab countries improve, the Canadian dollar is unlikely to see much weakness.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com