As we have predicted for many months, the dollar continued its downward spiral last week, falling to a record low against the euro.
We remind our readers that against the Fed basket of major currencies (euro, sterling, yen, Canadian dollar, but not the Chinese yuan), the U.S. dollar has depreciated by a whopping 26 percent over the past 6 years.
This remarkable depreciation is measured against currencies that are themselves depreciating against "real" money, or gold.
Story continues below . . .
Story Continues Below
(As our readers will know, the so-called free market price of gold has been manipulated downward for years by coordinated central bank gold sales, via the IMF, according to the CBGA, or Central Bank Gold Agreement.)
We feel sorry for Fed Chairman Ben Bernanke as he faces an increasingly desperate situation.
Unlike his fellow central bankers from competing developed nations, who have the single mandate of containing inflation, our Fed chairman has the often conflicting dual mandates of containing inflation and encouraging economic growth at the same time.
In addition, with the profligate spending of our government, Bernanke has now to face another new "unofficial" task: defending the U.S. dollar.
[Editor's Note: Four Gold Picks Set to Skyrocket in 2007 - Get Them Now]
However, because the U.S. dollar was the world's primary reserve currency, defending the dollar has never been seen as important by our American governments.
Today, however, the "politically-backed" euro appears to have gained enough credibility (at least, in the short-term), to become an alternative international reserve currency.
Faced with a new alternative, many central banks have taken the opportunity of diversifying at least a part of the fast depreciating U.S. dollars into the euro and even into sterling and the yen.
In addition, the central banks of our major competing economies, most notably the European Union (with anti-inflation hawk, Jean-Claude Trichet as its central banker at the helm) see inflation threatening and are increasing their key interest rates.
Judging by the contents of recent FOMC statements, Ben Bernanke is also concerned at rising inflation here at home. Interestingly, this is despite the fact that we believe that CPI figures are politically "cooked" to the downside.
Bernanke is clearly tempted to raise U.S. interest rates, but in the face of the housing bust, we have also long forecast, he is deeply concerned that increased interest rates may drive the U.S. economy, with its disappointing growth, into recession.
Facing this dilemma, the Fed has therefore kept rates on hold, at 5.25 percent, rather than raising them to hit inflation and/or to defend the dollar.
[Editor's Note: 12 Ways to Recession Proof Your Portfolio]
An increasing interest rate differential, relative to those of other major currencies is a major short-term factor in the downward plunge of the dollar.
In addition to interest rates, the overall condition of the U.S. economy, relative to its competitors, is of importance.
Although inheriting many of the good reforms of the Reagan era, Clinton achieved an average growth rate of 3.9 percent in his eight years as President.
Facing 9/11 and the dot com stock market bust, President Bush correctly ordered a vast array of re-flationary measures, to stave off any risk of depression.
The financial stimulation included major tax reductions (that have yielded a record total tax take); a negative (0.7 percent) Fed funds rate for most of 2005; and massive injections of liquidity and government spending; together with a national debt increased by over $3 trillion.
Despite this massive stimulation, our economy has grown at a relatively insipid average rate of only 2.9 percent, since the first quarter of 2002.
This record is viewed as relative economic failure by many currency traders and holders of U.S. dollars, who have hedged their bets by diversifying into other major currencies.
Despite an inflationary and very weak dollar, we have run up a massive trade imbalance with other nations, most notably of some $1 trillion with China. This does not go unnoticed by the currency markets.
In addition, NewsMax has heard, unofficially, that China has now started to diversify out of U.S. dollars into gold. This may explain the remarkable resilience of the gold price in the face of the recently announced $6.6 billion of IMF official gold sales, according to the CBGA. If this information proves to be true, it can be expected to have a major downward impact on the U.S. dollar's price if and when it becomes public news.
[Editor's Note: Try Intelligent Options for $99. Our lowest price ever. ]
If it were not for the housing bust and a serious risk of recession, we feel that the next meeting of the FOMC would result in an increased Fed funds rate. This, as we have long forecast, would have a serious downward influence upon the stock and the medium to long-term bond markets.
Finally, we believe that the result of a vastly unpopular and costly stagnation in Iraq could even risk a committed socialist, such as Hilary Clinton, as president of our country. Doubtless, the resulting economic disaster also concerns the currency markets.
In our view, Bernanke wants to raise rates, both to hit stealth inflation and to defend the U.S. dollar. But he is held back by the fear of causing recession.
Even with mixed signals on the economy, we believe that the pressures are mounting on Bernanke to come off the fence and defend the U.S. dollar to such a degree that we now see a 40 percent chance that the Fed will actually raise rates on May 9.
If we are right, the stock and bond markets are in for a shock.
Editor's note:
Four Gold Picks Set to Skyrocket in 2007 - Get Them Now
Try Intelligent Options for $99. Our lowest price ever.
Cash in on dollar slide. Make 25 to 50% in six months.
12 Ways to Recession Proof Your Portfolio
Protect Your Brain from Alzheimer's, Parkinson's
Miracle "Fatty Acid" Prevents Heart Disease, Strokes and Saves Your Brain! Read More Here Now
