Monday, November 15, 2010

Recipe for US dollar disaster --By Shan Saeed

Debasing of US dollar will not help the US economic growth or exports. It might be a tactical manouevring for limited short-term benefits. This strategy is not sustainable.

Federal Reserve’s accommodative policy will keep pushing the dollar lower, so investors would eventually buy foreign currencies like Aussie / Canadian Dollar[ commodity currencies], Gold and Silver to protect their wealth. Indeed, the precious metals may ultimately touch new highs going forward.

Fed strategy of increasing monetary base is ominous for the long run. It’s money printing in its simplest form. It drives up the cost of goods. It’s just a recipe for disaster. And it won’t do very much at all for the unemployment rate. I don’t think a country has ever prospered historically by diluting or debasing the value of its currency. In this case..US DOLLAR

Obama administration is hypocritical in calling for China to boost the value of the yuan. It is not the Chinese yuan but the US dollar which is the problem..Yuan has appreicated 24% against US dollar in the last 5 years. Currency war is initiated by US to replicate the 1930's scenario to punish the chinese when it abandoned silver standards. US is intentionally holding down the value of its currency. Benefits? To boost exports, create a bubble in the emerging market to have ripple effect on the global economy.

The reason Chinese don’t budge nearly as much as they possibly should is simple. They understand the US STRATEGY for dollar and chinese yuan. A weak dollar is never in the national or global interest. It’s never in my interest to have my dollars worth 80 cents. Strong dollar will provide confidence to the investors globally. This is strategically helpful for the US Dollar.

But I expect that the greenback would go down further. Maybe losing 5-7% of its value against the basket of currencies. I do think that FED will continue to undermine the dollar for the short-run. It is widely anticipated that more quantitative easing from the Fed. Thats the only game plan.

Strategy is simple

To flood the market with access cash and to throw more money in the emerging markets to create an asset bubble. This is strange that they don’t have a clue about true economics, or they are deliberatng ignoring for a short-term benefit. Lifting investors confidence with too much liquidity in the financial markets.

The Fed is highly unlikely to pull back from its easing in time to avert inflation. Their speeches will guide you that they’re pre-emptive on inflation. They’ll hike rates when they see signs of this thing happening. Precarious

The problem is that by the time you see signs of this thing happening, it’s already getting out of hand. It takes six to 12 months for a rate hike to take effect. Proven empirical studies illustrate that. So the question is how should investors deal with this sorry state of affairs? Buy foreign currencies — the Australian dollar or real asset or currencies like GOLD or SILVER.

Australia is raising interest rates, so you earn more income than in greenbacks. Investors are buying a currency that’s appreciating against the U.S. dollar and can rise in the face of inflation, because Australia’s a major commodity exporter.

As for as gold is concern, I think it ultimately has more room for upsurge since it is moving in parabolic form. It’s poised for a pullback in the near term. But, long-term, could it top $1,500/ounce in the next 14-months. I predicted Silver touching $27/ ounce in 18 months ...Silver kissed $27/ounce and pulled back..Bullish for its upside.

Disclaimer: This is just a research piece and not an investment advice..Inestors are encouraged to execute their own DD and investment strategy analysis

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