The US Dollar and Inflation!

The US Dollar Index is a measure of the value of the United States Dollar compared to a basket of currencies weighted accordingly:

  • Euro 57.6 % weight
  • Japanese yen 13.6 % weight
  • Pound sterling 11.9 % weight
  • Canadian dollar 9.1 % weight
  • Swedish krona 4.2 % weight
  • Swiss franc 3.6 % weight

The US Dollar typically has an inverse relationship to the other currencies and is traded at the ICE exchange. Post WWII, the US Dollar was tied to the Gold Standard, but today, the dollar is without intrinsic value. It is only valuable in that the US states its value. In recent years the value of the US Dollar may be decreasing due to oversaturation of the currency, low interest rates and the increasing debt in the US. The weaker dollar does typically help boost US exports as the foreign buyers may garnish more for their money when the dollar is undervalued. The US Dollar may also act as a safe-haven product that investors may flock to during times of uncertainty. The investment community may often reference the CFTC Commitment of Traders (COT) report to see the net longs or shorts in the market that week to determine any trends. It is typical to follow the big money in trading. Last week, for example, traders held a net short position in the dollar of $11.4 billion as of September 18th which was one of the largest short position in some time. The allocations shift and traders may follow the allocations. The US Dollar also may trade inversely to Gold which is actually another (hard) currency as well.

The US Dollar has played the pawn in this time of stimulus! ECB President Draghi had the market elated to hear his words of doing all that is necessary to support the Euro FX, but the reality was a letdown as traders hoped for more. The ECB may possibly start purchasing the Spanish and Italian bonds where at the same time they may lower the refinancing rate as well. They must wait for a request of a bailout before they can ignite their bond buying program. The ECB has already issued over a trillion euros in cheap loans to boost the economy and support bank lending. They encountered some difficulty in the banks parking the monies with the ECB nightly as opposed to lending to each other. He also decided to keep interest rates at 0.75 %. Again, we must refer to the mandate of the ECB to insure economic stability and monitor the inflation. The bold moves of European Central Bank Mario Draghi started this market on the move. The support of the European Stability Mechanism by the German Constitutional Council was supportive, but the program is null and void until an indebted country requests a bailout. Also, the Bundesbank is going back to check the legality of the ECB's bond buying program. The EU treaties that deal with the direct financing of the indebted countries or state deficits may be referred to the European Court of Justice. The European Stability Mechanism (ESM) is to become effective in October with capabilities of dispersing monies into the ailing banks. The concerns over Greece's deficit is also still weighing on the markets. The indebted country has had difficulty coming up with the budget cuts necessary to qualify for the next tranche of rescue funds. The country could still leave the Euro Zone. The troika made up of the European Commission, European Central Bank and the International Monetary Fund may have to return to Greece to finalize further budget cuts.

The Federal Reserve did not disappoint announcing a buy program of mortgage debt worth about $40 billion per month with an open ended condition. They will continue this program until the labor market shows substantial improvements. In addition, they intend to keep interest rates low until at least mid-2015. This is all on top of the two prior QE programs that purchased about $2.3 trillion in US government and housing debt. The US growth has been at 1.7 % annual rate with the last US Unemployment report coming in with a scant 96,000 jobs created last month. The US Unemployment rate had dropped to 8.1 % from 8.3 %. Analysts estimate that the bond buys could add up to about $1.7 trillion. QE1 was a $1.75 trillion program. QE2 was a $600 billion program. The Fed also remarked that the US economy could handle slightly higher inflation then the typically desired 2 % level. The fiscal cliff represents about $500 billion in expiring tax credits and automatic spending reductions. Thoughts are that if not dealt with, the US could spiral into a recession with potentially 2 million jobs at risk! The White House is to work on about $1.2 trillion of the automatic cuts unpleasant as it will be for both Democrats and Republicans. The spending reductions could potentially cut about $55 billion from defense and another equal amount from other domestic programs in 2013. Tax increases for the top income consumers may also be discussed. The White House is to report to Congress on the automatic spending cuts to go in effect under sequestration, a process where the government may exempt certain things, if an agreement cannot be reached. The cuts are expected to reach $109 billion in 2013 in both defense and non-defense programs.

US Dollar Chart!

The US Dollar (December) may be temporarily postured to trend slightly higher according to the Wilder's Parabolic SAR! The fundamentals may pressure the dollar into a range trade perhaps between $78.50 to $81.50 for some time. $78.77 is first level support!

The Federal Reserve had launched QE3 with thought that inflation was low and the economy certainly can handle slight increases when the labor numbers need focus for now! As fuel, housing and food costs rise in a increasing demand environment, the Fed may have to address inflationary concerns in the future. The Euro Zone crisis matters in that the progress may be setting the pace for global growth in the future. As the Euro Zone debt crisis kicked into high gear, it impacted China and US exports slowing down the demand, hence the production. The production may encounter cost increases which ultimately is passed on to the prices of the end product. This type of inflation is regarded as a “cost-push inflation” that can begin in a small way but is contributing to an inflationary infused environment and is reflected in the CPI report! The last US Consumer Price Index came in at +0.6 % while the previous reading was at 0.0 %. Typically when households experience the “cost-push inflation” they will attempt to compensate by requesting wage increases. The wage increases again may be reflected then in the cost of production. The inflationary spiral may be sustainable with a working labor force, but when a larger segment of the labor force is underemployed or unemployed all together, the environment can lead to negative impact. Typically, when the central banks wish to contain inflation, they will tighten their monetary policy to slow the growth in the economy.

Energy costs gravely effect the cost of production of goods and household costs making it a vital area that needs to stabilize. OPEC typically will set a price level that they feel will be a fair value of their product such as of late $100 per barrel. Inflation numbers can be seasonally adjusted to anticipate seasonal shifts in usage. For example, going into the winter months, heating oil and natural gas may be averaged in to avoid the cyclical spikes. There is a connection between inflation and unemployment! This fundamental concept is regarded as the Phillips curve suggesting a sort of trade-off between price stability and employment. This is really viewed as more of a short-term phenomenon as a bit more of inflation is regarded healthy as long as employment is rising. Should the economy experience both high inflation and high unemployment, then stagflation would take over as we had experienced in the 70’s.

Hyperinflation is inflation springing out of control, from the excessive printing of money that can devalue the currency and make it ineffective in purchasing goods and services. The National Inflation Association (NIA) has concerns that the US economy may enter a state of hyperinflation 2013 – 2015! The $2.3 trillion in US government and housing debt through QE1 and QE2 and the buy program of mortgage debt worth about $40 billion per month with QE3 including an open ended condition may stimulate growth and employment, but at the risk of the US Dollar devaluation. Recent US Treasury purchases from foreign central bank interests may have declined 20% while the Federal Reserve purchases have increased. The inflation normally may be more balanced with increased participation from foreign interest. The US private sector may also have decreased their US Treasury participation. China may be losing interest in the US Dollar as a reserve currency and may be using the Yuan as their reserve currency, but the Yuan is pegged to the US Dollar. The Fed Funds rate remains near zero establishing the excess liquidity of funds in the system. The US may wind up with a fiscal debt of $1.2 trillion at years end of 2012! The spending on foreign policy such as troops sent to Libya and Afghanistan may make it difficult to avoid hyperinflation in the future. The US Dollar is trading lower, but should stabilize at these levels as it in the best interest of the global community to have the US Dollar as the reserve currency. The US Dollar simply has no other currency to replace it. The outflows would have to be reallocated to another currency. In this, the US Dollar should remain temporarily weak, but still the favored world currency!

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By: Leslie Burton

6 thoughts on “The US Dollar and Inflation!

  1. Leslie,
    Does the Live Trading Room free trial you mention include charts and data or do I need to already have those? Do I have to give my Credit Card # to try it out? Will you be there?

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    1. Dear Gabriel,

      We give you a free trial of DT Pro for 2 weeks! The CFRN Indicators are in the platform to try! The data is free so if you decide to open an account there is no platform fee.

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  2. Forget Liddy,Lynn,Harrison and Burton remember every child born today inherits $200,000. worth of debt and it`s rising. Remember the Federal Reserve and Obama and then look and see,"Do I have Gold?' America has asked God to leave so this is what you get.

  3. Gordon Liddy said," A liberal is someone who feels a great debt to his fellow man, which he proposes to pay off with your money."

    1. And Gordon Liddy had such a firm belief in the validity of that thought that he was willing to participate in illegal acts to prevent voters from making their own choise.

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