All Currencies Beginning To Sink?

By: Paul Kasriel | Tue, Jun 14, 2005
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A wise acquaintance of mine, Clyde Harrison, is fond of saying that fiat currencies do not float; they just sink at different rates. How can all fiat currencies sink? If dollar is appreciating vs. the euro, the euro is sinking, but the dollar is floating higher, isn't it? Yes, it is floating higher vs. the euro, but they both might be sinking. How's that? Consider what has been happening of late to the price of gold - both in dollar and euro terms. Today, the euro price of gold hit its highest level since the inception of the euro of 356 euros per ounce of gold. Well, that's to be expected, isn't it, given that the euro has been depreciating against the dollar? And, wouldn't we then expect that the price of gold in dollar terms would be falling? That's what is suggested by the data in Chart 1. In the past 15 years, there has been a large negative correlation, minus 0.78, between the value of the dollar vs. the euro and the dollar price of gold. As the dollar rose against the euro, the dollar price of gold tended to fall.

Chart 1

Now, a couple of weeks do not define a trend reversal, but it is interesting that of late, the dollar has been rising against the euro and so, too, has the dollar price of gold (see Chart 2). In other words, both the euro and the dollar are sinking - sinking against the dollar. Could it be that global investors are becoming disenchanted with fiat currencies of all stripes?

Chart 2



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

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