Dollar Gives Back Advance

Wednesday, June 03, 2009

The US dollar was in a steady decline from early 2002 into early 2008. The Federal Reserve's adoption of a weak dollar policy in order to fight the recession resulting from the technology bubble fall-out put the top in the dollar's advance. Very low interest rates in the early 2000s along with the strengthening of the new euro currency put the dollar in a steep decline.

Steady quarter-point rate increases in the federal funds target rate starting in 2004 and running into 2006 provided support for the dollar and led to a modest bounce. Yet, another bubble had emerged built on low interest rates. The real estate market reached an inflated peak and crashed as adjustable-rate mortgages began to reset and homeowners could not afford the higher interest payments.

The Federal Reserve acted swiftly cutting rates again to an all-time low of zero to 0.25%. Yet, the dollar was briefly saved as Lehman's bankruptcy set off shockwaves throughout the financial system. The rapid deterioration of global dollar holdings tightened supply and the incredible flight to safety increased demand as investors ran for Treasuries.

The recent advance in the dollar, though, was hardly impressive. From the low to high the dollar gained 27% with the Federal Reserve printing money all the way. The dollar has already given back over 50% of the move looking likely to retrace the entire bounce. China has just cause to be worried about its Treasury holdings. While the US will likely be able to pay back its debts in nominal terms, the real return will likely be much lower as the US robs the world by devaluing its currency with reckless policies.


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