Make or Break Moment for the Greenback
Thursday, June 25, 2009
With all the talk lately about the dethroning of the US currency as the premiere reserve investment for sovereign countries, the debate is about to get a stark reality check.
This week, the US is doing its best to auction off a whopping 106 Billion Dollars in new debt, in a bond auction and what Forex online blogs and street traders are looking for is how quickly they sell. There is no doubt that it will sell out, but the questions are, who will be doing the buying? And, how quickly will it be sold?
The US auctions typically has a short life, with most of the debt going away even before the official gavel is dropped down. However, it has been a sobering sign for the US Treasury that in recent auctions, it was been more difficult to get rid of the debt, to the point that yields on the bonds and notes have hit record highs as if the buyers are saying that the investment is more risky than others and therefore you need to pay us for assuming that risk.
Another telling sign of the recent sales is that when the Federal Reserve, the Central Bank of the US, sees that the Treasury auctions are not selling out in a timely manner, the Fed buys the debt. This is equated with just plain printing money and diluting the value of the dollar, as the money used to buy the debt extends the treasuries credit line with the Fed.
The Fed is responsible for setting monetary policy such as interest rate levels and balancing the valuation of the dollar in relationship to other currencies. The US Treasury is responsible for the actual management of money. Yet, recent legislation has broadened the Fed’s scope of jurisdiction and it is easier for the Fed now to “loan” the treasury money.
Now, Forex traders are not stupid – we were all brought up learning that paying your MasterCard with your Visa is not a smart policy of money management – yet this is essentially what the US is doing.
China, Russia, Brazil and India – fondly known as the BRIC nations met last week and came out vocally for a new reserve currency alternative – and they did so by specifically mentioning the policy of printing money that the US is employing now. The statements they made make sense, how can they ensure the value of their investment if there is seemingly a conscious policy to water it down?
To correlate this to other investments, take the Ford Mustang. This year the Ford Motor Company is coming out with a limited edition (only 45 cars) of the Mustang to celebrate the 45th anniversary of the car.
Now, each car is unique and a throwback to the old style with modern bells and whistles and is already being bid up to over 200,000 USD per car. If Ford were to make hundreds of these cars, the uniqueness of the product will be devalued and would water down the investment value of the car. This is what the BRIC’s are afraid of.
So, this brings us to the auction this week. Considering that the primary buyers of the debt in past years have been the BRIC nations, what is their interest going to be in the record breaking bond issue this week? Are they going to put their money where their mouth is or will they succumb and continue to buy like heroine addicts in need of a fix?
I am not speculating on the outcome, I truly don’t have a clue. But, I do know that if they stick to their principles, the Dollar is in for a rough ride – and if they do not, the USD seems like a good investment in the short term.
This week, the US is doing its best to auction off a whopping 106 Billion Dollars in new debt, in a bond auction and what Forex online blogs and street traders are looking for is how quickly they sell. There is no doubt that it will sell out, but the questions are, who will be doing the buying? And, how quickly will it be sold?
The US auctions typically has a short life, with most of the debt going away even before the official gavel is dropped down. However, it has been a sobering sign for the US Treasury that in recent auctions, it was been more difficult to get rid of the debt, to the point that yields on the bonds and notes have hit record highs as if the buyers are saying that the investment is more risky than others and therefore you need to pay us for assuming that risk.
Another telling sign of the recent sales is that when the Federal Reserve, the Central Bank of the US, sees that the Treasury auctions are not selling out in a timely manner, the Fed buys the debt. This is equated with just plain printing money and diluting the value of the dollar, as the money used to buy the debt extends the treasuries credit line with the Fed.
The Fed is responsible for setting monetary policy such as interest rate levels and balancing the valuation of the dollar in relationship to other currencies. The US Treasury is responsible for the actual management of money. Yet, recent legislation has broadened the Fed’s scope of jurisdiction and it is easier for the Fed now to “loan” the treasury money.
Now, Forex traders are not stupid – we were all brought up learning that paying your MasterCard with your Visa is not a smart policy of money management – yet this is essentially what the US is doing.
China, Russia, Brazil and India – fondly known as the BRIC nations met last week and came out vocally for a new reserve currency alternative – and they did so by specifically mentioning the policy of printing money that the US is employing now. The statements they made make sense, how can they ensure the value of their investment if there is seemingly a conscious policy to water it down?
To correlate this to other investments, take the Ford Mustang. This year the Ford Motor Company is coming out with a limited edition (only 45 cars) of the Mustang to celebrate the 45th anniversary of the car.
Now, each car is unique and a throwback to the old style with modern bells and whistles and is already being bid up to over 200,000 USD per car. If Ford were to make hundreds of these cars, the uniqueness of the product will be devalued and would water down the investment value of the car. This is what the BRIC’s are afraid of.
So, this brings us to the auction this week. Considering that the primary buyers of the debt in past years have been the BRIC nations, what is their interest going to be in the record breaking bond issue this week? Are they going to put their money where their mouth is or will they succumb and continue to buy like heroine addicts in need of a fix?
I am not speculating on the outcome, I truly don’t have a clue. But, I do know that if they stick to their principles, the Dollar is in for a rough ride – and if they do not, the USD seems like a good investment in the short term.
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