us dollar value
- What to Expect When the Reign of the U.S. Dollar Comes to an End
- 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
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.
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.