Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20
Gold Mining Stocks Fundamentals - 18th May 20
Why the Largest Cyberattack in History Will Happen Within Six Months - 18th May 20
New AMD Ryzen 4900x and 4950x Zen3 4th Gen Processors Clock Speed and Cores Specs - 18th May 20
Learn How to Play the Violin, Kids Activities and Learning During Lockdown - 18th May 20
The Great Economy Reopening Gamble - 17th May 20
Powell Sends a Message With Love for Gold - 17th May 20
An Economic Renaissance Emerges – Stock Market Look Out Below - 17th May 20
Learn more about the UK Casino Self-exclusion - 17th May 20
Will Stocks Lead the Way Lower for Gold Miners? - 15th May 20
Are Small-Cap Stocks (Russell 2k) Headed For A Double Dip? - 15th May 20
Coronavirus Will Wipe Out These Three Industries for Good - 15th May 20
Gold and Silver: As We Go from Deflation to Hyperinflation - 15th May 20

Market Oracle FREE Newsletter


What Strong U.S. Dollar Policy?

Currencies / US Dollar Nov 17, 2009 - 08:50 AM GMT

By: Axel_Merk


Best Financial Markets Analysis Article"I believe deeply that it's very important to the United States, to the economic health of the United States, that we maintain a strong dollar," U.S. Treasury Secretary Geithner recently told reporters. Indeed, it seems to be a pre-requisite to apply for the position of U.S. Treasury Secretary to be able to utter these words. In the meantime, the greenback seems to be falling further and further; the 'strong dollar commitment' appears to have become a farce. Just what, then, would be a strong dollar policy?

Bloomberg Radio asked me last week what I would like to hear from Federal Reserve (Fed) Chairman Bernanke to support the dollar. I responded he had done enough talk, and that I would like to see some action. Indeed, as Bernanke spoke at the Economic Club in New York on Monday, the dollar rallied for a few seconds when his speech was released; in it, Bernanke said, "our commitment to our dual objectives [price stability and full employment] ... will help ensure that the dollar is strong..." The reason the dollar rallied was because initial media reports suggested the Fed will ensure the dollar is strong, whereas all Bernanke had said is that the Fed is committed to its dual mandate and, as a result, the dollar should be strong.

Let's look at the action, then. The Fed has been buying hundreds of billions worth of government bonds and mortgage-backed securities (MBS) by printing dollars - not currency in circulation, but virtual dollars by entering a few keystrokes on the Fed's computers; in Fed talk, we talk about an expanded Fed balance sheet, as the size of the Fed's balance sheet represent the dollars that have been "printed". Generally speaking, when you increase the supply of something - be that gadgets or dollars - the value of any one gadget - or dollar - should fall assuming constant demand. Our interpretation - Fed actions do not support a strong dollar.

What may support a strong dollar is if an "exit strategy" were implemented, not merely discussed. A true exit strategy would be to shrink the Fed's balance sheet again, to get rid of all those securities and replace them with nothing. Instead, for now, the Fed's exit strategy seems to be about reducing the rate at which it is printing money to purchase additional securities. For those to whom the Fed balance sheet is an abstract concept, think of it as super-money from which all credit originates. A dollar printed by the Fed can multiply by up to a factor of 100 by the time it has worked its way through the economy: a bank may lend about ten times more than it has in reserves; the recipient of the loan then deposits the money; the depositor bank then turns around to makes new loans based on the fresh deposit, and so forth.

The Fed's action to weaken the dollar goes beyond printing money. By printing money to buy MBS and government bonds, interest rates may be low, but these securities are now intentionally overvalued; rational investors - not just foreigners, but also domestic investors - may be inclined to take their money overseas in search of less manipulated returns. Our interpretation - Fed actions do not support strong dollar.

What may support a stronger dollar, in this market environment, sounds evermore like a novel concept: let the market determine the price of securities. Indeed, if we allowed market forces to play out, the credit contraction could run its course, may induce more consumer savings and push up the dollar.

Talking about low interest rates: a policy to keep short-term rates near zero is, in our humble opinion, not action that supports a strong dollar. A strong dollar policy would, in our view, include higher interest rates.

Let's talk about what the one trump card U.S. policy makers have been talking about: the current account deficit is shrinking. Indeed, over the past year, the U.S. current account has been coming down from what we believe had been unsustainable extremes. The current account deficit is exactly the amount foreigners need to buy in U.S. denominated assets to keep the dollar from falling; every day, foreigners need to buy about US$2 billion, just to keep the dollar from falling. It would be laudable to have a shrinking current account deficit if it came from a policy that fostered savings and investment. However, when the current account deficit shrinks because our imports are plunging (recession) and because consumers simply can no longer run up their credit cards and extract money from their homes, it sounds more like a disease policy makers haven't found a cure for, rather than a policy shift. Indeed, as some of the reflationary efforts are starting to work, the trade deficit - a key component in the current account deficit - is rising once again. Aside from the trade deficit, external financing requirements, in particular to finance government debt, factor into the current account deficit. Indeed, the best ways to promote a strong dollar over the long-term may be to institute policies that foster savings and investment. How about:

  • Allowing corporations to expense capital investments rather than requiring them to amortize them over years, in some cases decades. Fostering investments may help the dollar; a cash for clunkers program is foremost expensive.
  • Raising interest rates to reward saving;
  • Reducing or simplifying regulation in all industries to encourage investment.

Instead, the "incentive" for foreigners to invest in the U.S. is that the dollar has fallen so far that there may be bargains to be had. That sounds like offering your children candies as a reward for brushing their teeth, not exactly the recipe for healthy teeth in the long-run. There are many more ways in which tax and regulatory policies could foster savings and investment. In practice, we may hear a politician talk about the need for greater savings, but it invariably never progresses: after all, every politician wants the spending to happen now, and the saving later, to boost short-term growth.

Furthermore, we can't help but conclude that the Fed is mostly interested in boosting short-term growth. That's not surprising: when a country has a current account deficit, economic growth is the typical way to attract capital from abroad. But how about actively working on a more balanced economy that isn't as dependent on inflows from abroad? Japan and the Eurozone are two areas with economies that are roughly in balance; as a result, an economic downturn does not automatically lead to a weaker currency. Instead, Fed policy all decade long has been fostering global imbalances rather than stemming against them. This all should have ended with the credit bust last year; unfortunately, policy makers appear to want an alternative ending to the drama; it is our fear that to achieve a happy ending, we need to change course rather than reflate what got us into trouble in the first place.

Let's shift gears and talk about fiscal spending. The absolute level of government debt is a bad predictor of exchange rates; instead, prices are set by marginal buyers and sellers, cash flow items. As such, as deficits soar, financing requirements to pay for interest soar as well. By shifting to what may be the equivalent of an adjustable rate mortgage for government debt, the government has been able to keep its interest expenses at an artificially low level. In recent weeks, the Treasury has embarked on a major effort to extend the duration of government debt, realizing that it may be imprudent to refinancing trillions in the very short-term markets. An increase in supply of long-dated Treasury Bonds may push up long-term borrowing costs. The higher cost of borrowing may encourage the government to spend less - here we go, that would be a plus for the dollar. There's a debate on whether a potential gridlock in Congress at the mid-term election would reign in government spending. Unfortunately, any such gridlock is likely to affect only discretionary spending; as a percentage of the overall government budget, discretionary spending has been declining over the years. Said differently, we are not optimistic that fiscal spending is going to be contained anytime soon. Because of the daunting challenge, policy makers seem to favor inflationary growth policies; regardless of political persuasion, we do not see how either the Democratic or Republican party is truly proposing policies that support a strong dollar.

What about individuals? Aren't consumers to blame for the mess we are in? Some believe U.S. consumers are wired to run up their credit cards to shop, shop, shop. Genetically, U.S. consumers are no different from others in the world; sure, habits are hard to break - just as Japan has lost a generation of consumers. However, ultimately, consumers react to policies. When you flood the market with cheap credit, consumers will likely take the bait; the only reason why they aren't right now is because money is only reaching those with pristine credit. But that hasn't stopped policy makers from trying.

This analysis is not intended as a mere bashing of policies. We would like to illustrate that it is possible to have policies that encourage a strong dollar policy. The U.S. dollar has become the world's reserve currency because, over many decades, the U.S. pursued more prudent policies than many other countries. In the meantime, it is in no one's interest to have a weak dollar. But policy makers abuse that position and impose policies that may push a lower dollar on the rest of the world. There is only so much that the rest of the world can absorb. The fruits of the weak dollar policy may include a lower standard of living, a greater wealth gap, inflation and a rather unstable U.S. and global economy. That's a high price to pay, even when paid in today's depreciated dollar.

The ultimate strong dollar would be one based on a gold standard or modern variation thereof. Recent actions are a stark reminder that when you give the government the power to inflate, it invariably becomes the most politically convenient solution to solve the day's problems.

We manage the Merk Absolute Return Currency Fund, the Merk Asian Currency Fund, and the Merk Hard Currency Fund; transparent no-load currency mutual funds that do not typically employ leverage. To learn more about the Funds, please visit Separately, I just published a new book: Sustainable Wealth: Achieve Financial Security in a Volatile World of Debt and Consumption that explains the dynamics playing out in more detail, in addition to being a personal finance guide to allow investors to take charge of their financial destiny.

By Axel Merk

Chief Investment Officer and Manager of the Merk Hard and Asian Currency Funds,

Mr. Merk predicted the credit crisis early. As early as 2003 , he outlined the looming battle of inflationary and deflationary forces. In 2005 , Mr. Merk predicted Ben Bernanke would succeed Greenspan as Federal Reserve Chairman months before his nomination. In early 2007 , Mr. Merk warned volatility would surge and cause a painful global credit contraction affecting all asset classes. In the fall of 2007 , he was an early critic of inefficient government reaction to the credit crisis. In 2008 , Mr. Merk was one of the first to urge the recapitalization of financial institutions. Mr. Merk typically puts his money where his mouth is. He became a global investor in the 1990s when diversification within the U.S. became less effective; as of 2000, he has shifted towards a more macro-oriented investment approach with substantial cash and precious metals holdings.

© 2009 Merk Investments® LLC

The Merk Asian Currency Fund invests in a basket of Asian currencies. Asian currencies the Fund may invest in include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund invests in a basket of hard currencies. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a hard or Asian currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds owns and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard and Asian Currency Funds. Foreside Fund Services, LLC, distributor.

Axel Merk Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules