"It is a strange desire, to seek power, and to lose liberty; or to seek power over others, and to lose power over a man's self." -- Francis Bacon 1561-1626, British Philosopher, Essayist, Statesman
A penny saved is a penny earned; we say maybe this is true if the penny is made of silver, palladium, platinum or Gold.
Despite many interest rate hikes the dollar is breaking down because foreign governments are running out of places to invest their huge dollar reserves.
The Unicoal deal was blocked preventing the Chinese company CNOCC from buying it, even though about 80% of its assets are overseas. Then there is talk of slapping a tariff of 27% on some of china's exports because of the ever-increasing trade deficits. They have now dropped this idea but the damage has already been done. When one looks at what's going on one cannot help but feel the US wants bread, butter, Jam and cream at the same time. China is going to be the world's largest holder of US debt by years end and if they are busy bankrolling our extravagant life styles how can we afford to tell them how they should run their business. Eventually they are going to get tired and say you know what we don't want to lend you any more money.
The US prevented DP world a Dubai company from taking over the ports even though they were being managed by on overseas company before this deal. And so these foreign governments must be asking themselves hey what are going to do with this worthless paper if the US government won't let us buy any US assets. The only value now that the United States has is in its assets, take away these and no one will want to hold the dollar. This is one of the primary reasons the dollar failed to break past 92 for any significant period of time, though it did rally significantly from its lows it could have done much better.
The dollar could have rallied higher but foreigners are probably reluctant to hold the dollar just for its beauty. One must be able to do something with it other then hatch eggs. The only thing that might help is if overseas investors make up for this shortfall as many countries are now divesting from the dollar by increasing their Gold reserves, Euro reserves investing in the infrastructure of energy rich nations, etc. Relying on the overseas investors to buoy the dollar might not be the best strategy as most individuals in the world have somewhat of a negative opinion when it comes to the United States. Therefore we feel that technically the Dollar rally is over; it could (the key word being could) mount another rally but the momentum is coming to an end.
When interest rates rise bond rates fall and vice versa. From the above chart we can see that Interest rates bottomed between April- July 04; they then proceeded to rise slowly. Notice also the long term 6 year up trend line has been violated which suggests that higher interest rates will be something of a fixture in the years to come. Now it would be normal for the dollar to keep rallying in the face of higher interest rates but the chart below clearly illustrates this is not the case. As stated clearly upwards one of the huge reasons for this is that foreign governments are swapping their dollars for Euros, Gold, or investing them in the infrastructure of other nations because they are being restricted from purchasing US assets.
Charts provided courtesy of www.prophetfinance.com
The most interesting part is that the US is playing hardball with China when its set to become the largest holder of US paper. The Chinese and also the Russians have openly stated that they are going to readjust their reserve ratios so that a larger portion is allocated to Euros and Gold.
If you look at the chart of the dollar you notice it actually was able to break through the long term down trend and establish a new up trend. We were one of the first to turn bullish on the dollar but you will notice that it has now broken the new up trend line and it appears certain that the long term down trend line will re establish itself sooner or later. We closed half our longs on the dollar about 9 weeks ago and then the remaining half about 6 weeks ago. We are now long another currency, which has already rallied very nicely; we will mention this currency publicly in a few weeks.
Bonds have broken their long term 6 year up trend indicating that higher interest rates are here to stay. We might have a respite here and there but nothing that will last. Conversely the dollar has broken it's newly established up trend line indicating that it is just a matter of time before the long term old trend line is re established. The high cost of these multiple wars combined with the fact that we are blocking foreigners from purchasing US assets has resulted in the dollar breaking down even faster then it should have. The primary reason right now is the restriction the US is placing on foreign governments. We need their dollars to finance our deficits but at the same time we want to tell them how they should spend those dollars. It reminds of this expression "those that bite the hand that feeds them are doomed to lick the boot that kicks them".
"Sure of their qualities and demanding praise, more go to ruined fortunes than are raised." -- Alexander Pope 1688-1744, British Poet, Critic, Translator