Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Dollar: The Last Hurrah?

Currencies / US Dollar Sep 22, 2014 - 02:20 PM GMT

By: Ned_W_Schmidt

Currencies

End of empire is a difficult time for two groups, investors and patriots. A hundred years ago the U.S. took the economic baton from England to become the most important economy in the world. No doubt some loyalists refused to recognize the shift that was taking place. From then on the world began to denominate economic activity in U.S. dollars. Holding British pounds might have been the loyal thing to do, but it was not a wise investment decision. Today, a similar situation exists for the dollar. Dollar-based investors may now be facing the "last hurrah" for the dollar, and should not ignore that possibility.


Schmidt US Dollar Index

In the chart below is portrayed an index of the value of the U.S. dollar versus sixteen(16) important currencies. As such, it is more representative of the global value of the dollar than popular dollar indices which are generally poorly constructed. The widely used dollar index is composed of 77% European currencies. It has no African, South American, or Asian currency beyond the Japanese yen. The Chinese Renminbi is not included.

Our interest in this chart is the latest rally. That upward move in the index was created by two forces. First of those was Russian incursion into Ukraine. Second force was momentum traders that identified the shift and leaped on it. Rationalization, and it is nothing more than that, for most recent component of rally has been fantasy that the Federal Reserve has now become the only responsible monetary authority among the major currencies. And yes, the cow jumped over the moon.

Latest rally in this dollar index is one of the most dangerous of chart formations. Highlighted by the bold, black line is the parabolic pattern. In this pattern the rate of rise, or slope of the line, increases as the rally progresses. This type of market action is unnatural, and normally leads to a dramatic correction. That chart pattern suggests the U.S. dollar is poised for a fairly dramatic fall.

China versus US GDP

Source: ihs.com

The unnatural nature of this rally can be visualized by the act of throwing a ball into the air. The momentum of the ball declines as it rises, eventually turning negative. The ball then falls to ground, every time. In the case of the formation highlighted in the chart, the "ball" rises faster as it goes up. The speed of the rise, measured by the slope of the line, increases, and assumed to ever do so. That is not how the world works. We suggest you try it with a ball if you are a doubter.

The pages of a calendar do turn. In the case of the current calendar, the pages are turning toward China. Some strong fundamental reasons exist for coming secular weakness in the U.S. dollar. The biggest one is China. IHS's recent long-term forecast for the U.S. and Chinese economies, shown in graph below, is an important reminder that China is to become the largest economy in the world. While the exact timing of the projection of that event, by 2025, might be off by a year or so, the inevitability of that event is not in doubt.

China's economic dominance will rise from the consumption miracle that has been in process for some time. The consumer base in China is continuing to expand due to ongoing urbanization in that nation, and improved economic conditions in the rural areas. The movement of consumers from a rural area to a city multiplies their lifetime incomes many times. That higher income will be spent, just as it is by consumers in any country.

China's consumption driven economy has already broadened that nation's impact on global trade.

In a recent article in Caixon ("RMB as Reserve Rebalancing the Global Financial System",September-,2014), Peter Wong noted the importance of Chinese trade in the world:

"In 2012, the last year for which statistics are available, China was the biggest trading partner for 124 countries as opposed to 76 for the United States."

US$ Renminbi

The reality of China coming to dominate world trade cannot be ignored. While on average the dollar dominates global trade settlement, at the margin the Chinese Renminbi is increasingly used to settle that trade. Nearly 20% of trade with China is now settled in Renminbi to avoid the cost of foreign currency conversion. The long-term shift to the Chinese Renminbi is evident in the rising value of that currency relative to the dollar in recent years, as shown in chart to right. Remember that the Renminbi is not included in the popular dollar index which means the dollar's performance is over stated by that index.

The public offering of shares of Alibaba(NYSE: BABA) has been accomplished with true gusto, and no clearer example of a mania, bubble, feeding frenzy, auction mania, etc. is possible. Actually, the English language lacks a word to adequately describe the euphoric market conditions fostering such demand. Gold may be an investor's only defense against this epoch Techo-Mania, as it is surely a terminal event.

BABA's offering is important as it confirms two factors, one of which will ultimately send the Renminbi higher and the dollar lower. First, the center of the investment world is moving to China from New York City. Second, China will likely dominate the technology world in the years ahead just as it will do so in the economic world. A derivative of that is the Renminbi will increasingly capture market share in the world of currencies.

Wong opened the article mentioned above by writing,

"If the account of the 20th century was written in dollars, the account of the 21st century will be bilingual, dollars and yuan."

We would modify only somewhat Wong's conclusion. Due to distrust of governments, the currencies of the 21st century will include Gold more so than in near a hundred years. With the dollar's global role declining, money will seek out some alternative to it. But, investors may be very reluctant to fully embrace the Chinese currency. That reluctance will simply increase the importance of Gold.

Ned W. Schmidt,CFA is publisher of The Agri-Food Value View, a monthly exploration of the Agri-Food Super Cycle, and The Value View Gold Report, a monthly analysis of the true alternative currency. To contract Ned or to learn more, use either of these links: www.agrifoodvalueview.com or www.valueviewgoldreport.com

Ned W Schmidt Archive

© 2005-2022 http://www.MarketOracle.co.uk - 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