Will the U.S. petrodollar collapse in 2015? If the world’s largest energy exporter and the world’s largest energy importer have their way, it may.
- Why the U.S. Dollar Is Getting Stronger – and How to Play It
- Catalyst #2: Will the Petrodollar Collapse in 2015?
- Cash Hoarding Corporations Hurt by Strong Dollar
- The Golden Yuan Is Coming – Here's How to Play It
- Why There's No Real Inflation (Yet)
- U.S. Dollar Forecast: How to Play A Short-Term Rally and Defend a Long-Term Crash
- Three Reasons Why the U.S. Dollar is Really Rising
- The Dollar Is DONE: Four Ways To Profit As the U.S. Dollar Dies
- The "Pesofication" of the U.S. Dollar
- The Death of the Dollar: Will the Fed Kill the Greenback at Tomorrow's FOMC Meeting?
Start the conversation
Larry Fink says the strong dollar is bad for the U.S. economy. That's no surprise. But the Blackrock boss didn't mention, in his April 6 interview with the Financial Times, that the skyrocketing dollar could trip up the biggest tech companies - those that thought themselves smart for parking squillions overseas to avoid U.S. taxes.
The U.S. dollar has been the world's de facto reserve currency for almost 90 years.
But this financial dominance may be nearing its end.
In recent years, China's been floating the idea the yuan should take on the dollar's role as the world's reserve currency.
In fact, the Chinese have already negotiated numerous bilateral trade deals that completely bypass it.
And they've even called for efforts to "de-Americanize" the global economy.
Whatever happens, China's economic rise foreshadows increased influence.
It's a trend that not only has serious implications, but also great profit opportunities, if you know what to expect...
According to Nobel Prize-winning economist Milton Friedman, "inflation is always and everywhere a monetary phenomenon."
Well, apparently not...
There's certainly plenty of cause for inflation today. Every central bank in the Western world is holding interest rates down, and almost all of them are printing money like it's going out of style. And the big deficits governments were running should be making inflationary matters even worse. Taken together, monetary and fiscal policies are far more extreme than they have ever been.
But today inflation is only running at around 2% - well below where it should be, according to Milton's monetarist theories.
What does it all mean?
What we're seeing is only a short-term rally inspired by Europe's travails. In the long-term, the U.S. Federal Reserve's loose monetary policy and the United States' own debt burden will drive the greenback back down.
That's the consensus among experts who follow the global money markets and the leading currencies, including several of Money Morning's own analysts.
The Fed has pumped trillions into the worldwide financial system as part of misguided stimulus efforts that should be incredibly inflationary.
Yet, instead of a disastrous repeat of the Weimar Republic, the U.S. dollar has strengthened considerably.
This despite rising unemployment, slowing economic growth and a debt debate that's about to begin anew.
Since last July, the U.S. dollar has risen against all 16 major currencies while the Intercontinental Exchange Dollar Index is up 12%, according to Bloomberg.
In fact, the greenback is now higher than it was when the Fed engaged in Operation Twist in late 2011 as part of a plan to keep the dollar low by buying bonds.
So much for Club Fed's plans...
As usual, they don't really have a clue about how real money works -- let alone why it flows and where it's going.
Taking the Mystery Out of the U.S. DollarHere are the three reasons why the U.S. dollar is really rising:
1. Institutions are unloading gold to raise cash against anticipated margin calls, redemption requests, or both. They are parking that money in treasuries and in dollars, creating additional demand. There are simply more buyers than sellers at the moment, so prices for dollars and treasuries are rising. And not just by small amounts, either.
2. Institutional portfolio managers and traders are required to maintain specific classes of assets under very specific guidelines. These guidelines dictate everything from the amounts being held to the quality of specific investments.
Many, for example, are required to hold only AAA-rated bonds, or invest in stocks meeting certain income, asset size and volatility criteria.
Imagine you're Jamie Dimon and you have to hold reserves against trading losses or you're Mark Zuckerberg and you've got to build up a large legal settlement fund for the Facebook IPO.
Or, perhaps you're Tim Cook of Apple and you're sitting on $110 billion in cash for future investments.
Chances are you're going to want to buy things that are as close to risk-free as possible to ensure your assets hold their value.
A year ago, you could choose from eight currencies in the G10 that met internationally accepted "risk-free" ratings criteria as measured by the cost of credit default swaps priced under 100 basis points.
Now, there are only five to choose from. A year from now, there might only be two or three.
While paying for a pizza in London with this foreign cash was difficult, having those "safe-haven" currencies in hand helped me sleep at night.
We've reached that point again. In light of the debt-ceiling debacle in Washington, the U.S. credit-rating downgrade by Standard & Poor's, and the likelihood that a long stretch of dollar-killing stagflation is headed our way, it's time to take refuge in today's safe-haven currencies.
And I'm going to show you the safest of those safe havens.
But we're really talking here about the dollar's long-term demise.
The pesofication of the dollar represents the end of the greenback as a major world currency and figures to be one of the major long-term challenges that we U.S. investors will face.
The dollar's demise was set in motion several years ago. But the greenback's fate was sealed in late April, when U.S. Federal Reserve policymakers had a final chance to take a stand against inflation - and failed to do so.
Let me explain ...
Catalysts for the "Pesofication" of the U.S. DollarFour years ago, I referred to the U.S. greenback as the "Bernanke peso." I coined this term, reasoning that U.S. Federal Reserve Chairman Ben S. Bernanke's decision to cut interest rates even as inflation was accelerating was bound to cause the dollar to lose value at an ever-increasing rate.
My prediction held up for a time, but was then derailed by the little matter of the collapse of the U.S. banking system. However, after the Fed's April 27 meeting, I can report that we're right back on track, and the pesofication of the dollar is progressing with startling rapidity.
That late-April meeting of the central bank's policymaking Federal Open Market Committee (FOMC) was the Fed's best chance to set a new course before its $600 billion "quantitative easing" program is scheduled to end on June 30. (The FOMC meeting scheduled for June 20-21 falls too close to the end of the Fed's quantitative-easing/U.S. Treasury-bond-purchase program for a new policy to be established.)
Bernanke seemed to underscore this by announcing that the central bank would, indeed, stop purchasing Treasury bonds on that date. He also explained that, in his view, the "market effect" of bond purchases is determined by the "stock" of bonds outstanding - as opposed to the "flow" of bonds into and out of the market.
We shall see.
Here's my bet: When the Fed stops buying about $225 billion of the Treasury's $400 billion quarterly funding needs, all hell will break loose in the Treasury bond market. After all, the two largest T-bond buyers are not going to be particularly active this summer: The Bank of Japan (BOJ) will be too busy spending money on that country's reconstruction from the earthquake/tsunami/nuclear power plant accident to be buying much U.S. government debt, while its counterpart in Mainland China - the People's Bank of China - has made it clear that it regards the United States as a pretty dodgy credit risk.
As in ... tomorrow.
At 12:15 p.m. tomorrow, at the conclusion of a two-day Federal Open Market Committee (FOMC) meeting, we'll find out whether U.S. Federal Reserve Chairman Ben S. Bernanke and his policymaking posse opted for a sharp increase in U.S. interest rates - which appears to me to be the only solution to a looming third-quarter crunch.
Unfortunately, I don't think that Bernanke & Co. will make the needed move.
And without that sharp rate increase tomorrow, investors can look forward to rampant inflation, an evisceration of the U.S. Treasury bond market and - in a worst-case scenario - the death of the dollar.
Let me show you why....
To understand why it's crunch time for the dollar, please read on ...