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Lloyd Blankfein has got it all wrong again.
Speaking last week, the Chief Executive of Goldman Sachs (NYSE: GS) claimed that if the "fiscal cliff" of tax increases and spending cuts go into effect on January 1, the U.S. dollar would lose its reserve currency status.
As the Vampire Squid's representatives often do, Blankfein actually has it backwards.
Contrary to what Blankfein thinks, a legitimate movement to deal with the fiscal cliff would cut the federal deficit in half, make the country more or less solvent and strengthen the dollar.
However, the problem is that the fiscal cliff involves pain. And since politicians like to delay pain as long as possible, the chances are good the fiscal cliff will be postponed again.
Instead, the country will likely continue to run trillion-dollar deficits in the hopes that Ben Bernanke can finance them through even more quantitative easing. It's the only play in the Keynesian playbook.
Unfortunately, that is the policy most likely to crash the dollar -- and it's headed our way.
So what will the world look like when the dollar has crashed, and international investors and traders have lost all of their confidence in the greenback?
The truth is if that happens it won't be like anything we've seen within living memory.
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Fiscal Cliff 2013: Global Concern is Growing
It's been a couple months since the Congressional Budget Office shared some negative news about the looming "fiscal cliff" - even suggesting a possible 2013 recession - and investors worldwide are starting to take the warning more seriously.
The fiscal cliff is the coinciding action of tax increases and spending cuts that will activate on Jan. 1, 2013 unless Congress and the White House take some action to either delay or change them.
Should these two actions combine, you'll watch $7 trillion be tagged onto the nation's debt over the next decade. This would come out to around $500 billion next year,according toCNN.
Not helping matters is that we've unofficially hit the middle of summer; the clock is ticking louder for the fiscal cliff as expectations for political stagnation instead of a resolution have increased ahead of Election 2012.
A recent Morgan Stanley (NYSE: MS) survey highlighted the fiscal cliff concerns.
According to MarketWatch, 65% of global investors - 71% of U.S. respondents - believe that "the fiscal cliff will cause significant uncertainty in markets for the rest of the year, but think policy makers will ultimately agree to extend most or all of the expiring stimulus and tax measures."
But only 24% of global investors believe the risks surrounding it are overblown.
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Fiscal Cliff 2013: IMF Warns of Global Impact
Worries over the looming "fiscal cliff" are spreading, and implications of the scheduled tax increases have become a growing global concern.
The fiscal cliff is the coinciding action of tax increases and spending cuts that will activate on Jan. 1, 2013, unless Congress and the White House change or at least delay them.
Everyone has an opinion on the matter, and this week the International Monetary Fund added its two cents.
The IMF issued a fresh report Tuesday warning that failure to avoid the fiscal cliff in 2013 could put the brakes on the U.S. growth rate, pushing it under 1%. Such a slowdown poses great risk to economies worldwide.
The IMF said the global implications for early 2013 are a negative growth rate with "significant negative repercussions on an already fragile world economy."
"It is critical to remove the uncertainty created by the "fiscal cliff" well as promptly raise the debt ceiling, pursing a pace of deficit reduction that does not sap the economic recovery," the IMF said in its annual health check of the U.S. economy.
Under current fiscal cliff terms, the proposed spending cuts and tax increases would minimize the deficit by approximately 4% of GDP in 2013.
Lawmakers should, the IMF counseled, replace the fiscal cliff with a program of small deficit reductions in the short-term with a longer term fiscal sustainability program.
Christine Lagarde, IMF Managing Director, said at a press conference Tuesday that a small deficit reduction means cuts amounting to 1% of GDP next year. The downside risks to the U.S. economy as well as worldwide financial systems have deepened, she noted.
"We believe that fiscal consolidation is necessary but not just any fiscal consolidation. It has to be sensible and certainly not excessive," said Lagarde.
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U.S. Dollar Forecast: Seven Ways to Profit in 2011 – Despite the Greenback's Expected Struggles
The U.S. dollar faces a long list of challenges in the New Year.
The U.S. greenback could strengthen in 2011-but only against the European euro and other currencies with heavy exposure to the European debt crisis, including the British pound sterling. Against virtually every other currency, however, the U.S. dollar is likely to be the loser.
In short, the outlook for the dollar in the New Year depends almost entirely on which currencies you're comparing it with.
Three Ways to Profit as China Dumps Japanese Debt
As a veteran trader, I have a tendency to look past the day's top headlines. That's why a recent Bloomberg News story - which stated that China sold a net total of 769.2 billion yen ($9.24 billion) worth of Japanese debt in September - really caught my eye.
By itself, this story probably wouldn't be a big deal. But this development is the start of an important new trend in the global currency markets. And the following three factors tell me that we should be taking a close look at why China has decided to dump Japanese debt. For instance:
- Given that the same thing happened in August, September marked the second straight month Beijing has sold more Japanese securities than it purchased.
- This marks the reversal of a seventh-month stretch of China being a net purchaser of Japanese debt.
- The two months of sales nearly wiped out the net surplus of 2.32 trillion yen ($27.86 billion) that China had amassed as a result of seven months of buying Japanese debt.
- Finally, the 2.02 trillion yen ($24.26 billion) worth of Japanese debt that China sold in August was China's single-largest monthly sale of Japan government bonds since 1995, when these statistics first started being recorded.
Let me explain....
To understand how to profit from this currency-market development, please read on...
Singapore Moves to Restructure Asia's Stock Exchange Model With Australia Merger
Singapore Exchange Ltd. (SGX) announced yesterday (Monday) it agreed to buy Australia's main stock exchange, ASX Ltd., for $8.3 billion. The deal came about because both countries seek strength against growing Asian market competition, and Singapore strives to be a more sophisticated global financial center.
In a cash and stock deal, Singapore's stock market operator is offering A$48 (U.S. $47.11) for each ASX share, consisting of A$22 in cash and 3.743 SGX shares per ASX share. The offer is at a 37% premium to what ASX shares traded on Friday.
"The combination of ASX and SGX, offering innovative new products and services to the market, will allow customers to maximize future opportunities, where Asia Pacific takes center stage globally as the source for capital, wealth creation and trading opportunities," SGX Chief Executive Officer Magnus Bocker said in a joint statement.
Money Morning Mailbag: China Needs to Boost Domestic Demand to Continue Economic Recovery
China released data this week showing its economy grew 9.6% in the third quarter from a year earlier, slower than years past but still significantly ahead of other countries that are struggling to stabilize their economies.
A slight dip in growth is what China wanted. Its gross domestic product (GDP) has grown on average more than 10% annually since 2006. The country's central bank lifted rates this week by 0.25 percentage points for the first time since 2007 to further cool the risk of overheating.
While working to maintain a healthy level of growth, China now has to contend with other countries devaluing their currencies to compete against a cheap yuan that is fueling an export-driven recovery. However, the whole world can't depend on exports – somewhere along the line there must be growth in demand.