Dollar Debate Misses at G8, but Criticism is still there

So the Dollar was spared yesterday, spared by a seemingly minor situation in an obscure city in an insignificant province of a very relevant state. The Uighur uprising in China took the debate about the value of the dollar as a global reserve unit off the table at the G8 (due to the fact the Chinese president, Hu Jintao, was forced to leave the summit), however it did not stop the show of concern that America’s counterparts in the G8 had.

Germany, one of the US’s staunchest supporters during the Bush years, have chilled that relationship and have become more openly critical of the Obama administration. In the past, when the German government had a problem with the US’s policies, you read about it weeks after it had been sorted out, George W. Bush had a great relationship with the German Chancellor Merkel, and it showed.

It is ironic. Obama’s social philosophy is more aligned with the German’s and much of Western Europe for that matter, Bush was far to the right of where Europe was. However, we are seeing a spate of discontent from the Western European leaders at the Obama policies – and this is most evident in the words and silence of Germany.

Long-time Forex traders know this to be true as in the past, we did not see the spikes we do today in the Dollar, after a European leader gives a speech, today it is routine.

In the absence of the BRIC debate on a global reserve currency, Angela Merkel, the German Chancellor, filled in nicely and spoke of how the focus of many nations vital to the economic stability of the world has been on reliving mistakes of years past.

By assuming the policies of stimulating the economy through a broad array of spending programs, a tactic that was employed and failed in 1933, the rising debt has been ignored and has grown in such a manner, that the entire world is now under threat of jeopardy in more profound manner.

Merkel’s concerns are valid and Forex online traders need to keep this in mind when dealing in the Dollar. As we have seen, the Japanese Yen has been profiting nicely from the return of safe-haven flows where it usually took a secondary role to the Dollar in this capacity.

The Dollar is volatile, more than ever before, because traders as well as the long-term investors are unsure of which way to go. Sentiment keeps us in the Dollar, but reality forces us to look away.

I believe the next three months are vital to determining which way the pendulum will swing for the Dollar – and it starts with the criticism of a European leader that an American policy is too liberal. Go figure.

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Livin' La Vida Loca Down Under

I have spent so much time talking about the US and Europe lately, that I have almost neglected my favorite currency, the Aussie. So I will try to avoid ranking on Obama and Brown and Trichet, while I put a plug in for the down under dollar and go back to my love relationship with the potential this currency has.

The Australian employment report that came out overnight brought about another rise in Online Forex AUD Trading, almost across the board (The Yen had a strong day too). While the key change in employment payrolls was much better than most Forex Online traders expected at almost unchanged levels, the internal numbers could spell trouble.

The numbers showed full time employment falling sharply and part-time employment rising sharply, which is normal in a recession when most of the world’s industrialized nations are dealing with a 10% jobless rate. However, you do not want this to continue long term.

As well, the unemployment rate surged to 5.7%, still far below the global average – but nonetheless worrisome as the number keeps going up. This number matches the highest level seen in Aussieland since late 2003.

But here is why the currency is strong: The AUD continues to find strength as bonds have not managed to rally and equities stormed back into the close yesterday in the US after a steep intra-session sell-off.

The background theme for Aussie strength is the idea that the global recovery, led by China, is underway. I read an article in the Wall Street Journal just this morning about the levels at which the Chinese are buying commodities, which is bringing about serious questions of its sustainability.

If this trend slows in the near future, which I do not think it will (and I will explain this below), the Aussie could be in for a very sharp adjustment lower across the board. Chinese trade numbers are still off sharply for both imports and exports on a year over year basis.

Now, while the vaulted WSJ might believe this trend will burst eventually, sooner rather than later as they said, I am finding it difficult to swallow. Here is why: The Chinese have been consuming commodities at an alarming pace for their building, this is how they are stimulating their economy. But back in March I wrote about how the Chinese are also buying up commodities using US Dollar (Yes, I know I promised I but cannot resist mentioning the Greenbuck) while at the same time making public calls for a change in the global reserve standard.

Essentially, China is swapping Dollars for tangible items – and while the WSJ uses the import and export figures to assume that their consumption has to end – I am looking at their 2 Trillion Dollar reserves and saying, they are swapping paper for copper and oil and gold and iron because right now, there is not option other than the dollar – except real stuff.

So have no fear, the Aussie will be here – trust me on this.

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US Debt is getting more Expensive for the Taxpayer while the US digs itself in deeper

News came out yesterday that shows the US Treasury Bonds yields are going up at a record pace. Well, these yields are not fixed and are set on an open market based on demand - the more demand, the less the yield and vice versa.

For the US taxpayer, it means that the price of funding their enormous debt (11 Trillion Dollar) is becoming more expensive (a lot more…) and if the trend continues, it will inevitably have a stark impact on the value of the dollar.

Just think, for every 100 Dollars the US borrows, it now needs to pay back 104.35, for every 1,000, it needs to pay back 1043.50, for every million, it needs to repay 1,043,500, for every Billion, the cost is 1,004,350,000 and for every Trillion the number is 1,004,350,500,000. Translate that into the 11 Trillion Dollars that the US is in the hole for, and you’ll get an annual interest rate of 47,855,500,000 US Dollars. I’d say we have a bit of a problem here…

If you take that staggering number of almost 48 Billion Dollar payment, and divide it among the 350 million US taxpayers, it totals about $178 per person – to pay back the principle, it would cost almost $32,000 per person – more than average annual wage for an American. So the question on the minds of Forex online traders is “how is this going to work if the US does not devalue their currency to offset these costs?”

Keep in mind that this week the US is auctioning off another 65 Billion Dollars in debt. Considering that the cost is getting higher for them right now, this only adds to the problem. The issue is beginning to overtly affect the way in which the US’s leading lenders, namely China, view the US.

A leading banker in China was quoted recently as saying in a cynical manner that the US should start issuing their debt in Yuan, the Chinese currency, rather than dollars. While this was an obvious joke, my mother always taught me that within every joke lies some semblance of truth.

With the US now owning 60% of General Motors and after the Supreme Courts decision to delay the sale nearly 70% of Chrysler, one has to wonder who really owns it. If the US taxpayer is in hock to China for more than 2 Trillion Dollars (a liability of $5,714 per person) while owning 50 Billion Dollars worth of GM (an asset of $157 per person) – do the math.

The trading in the Dollar has picked up in the past two sessions, as Forex online traders and Forex blogs predict a US recovery – but I ask you here, look at the numbers yourself and decide whether a recovery is indeed “just around the corner”.

And one last thought, if it were, the US GDP would need to swell to 48 Trillion Dollars for it to do so, and that would only pay off its obligations in 10 years. The US GDP currently stands at 12 Trillion - Just something to think about.

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China Worried about US Debt - The making of a Powerhouse

Richard Fisher, head of the Federal Reserve Bank in Dallas, Texas – one of the US’s largest states – told a British Newspaper yesterday that the Chinese are incredibly concerned over the US governments handling of the financial crisis, specifically, the printing of money by way of the Federal Reserve buying US government bonds, treasury bills and notes. For those of you that don’t know this, when a government wants to increase its cash position, it “lends: itself money by buying up its own debt. I know most of wish we could do that, but if this were the case we would be bankrupt with houses stripped and cars repossessed and the rights to our firstborn taken as well.

This is yet another example of China showing they are worried. Did they come out and tell Ben Bernanke or Tim Geithner, the US Fed Chairman and Treasury Secretary? No. Did they send a letter to Vice President Biden or talk with Secretary of State Clinton? No, and Clinton was just there. Did they address the congressional delegation who came to visit them this week – a delegation that included the speaker of the US House of representatives Nancy Pelosi, AKA the third most powerful person in the US? No. What they did do was take a round about way to let people know they are unhappy with the status of their investment and the way in which the CEO is handling the company. By Company I mean, The US and by CEO I mean Obama.

The Chinese are in a difficult spot, and I have written along these lines before in my Online Forex Blog, you see if they cause a widespread panic in the markets by making such a fuss over this, the value of their investments go down even further. Widespread panic regarding a rating decrease last week showed what it could do, the Dollar fell hard. What would happen if the Chinese leadership addressed the US leadership on this issue directly – it would take away the air of hearsay that exists now through these drips and drabs of media reports.

The Chinese are able to get their message out this way, but not in a way that would cause so much of a stir. Who reads these little interviews aside fro ma few of us boring people with nothing more to do? Wen Jiao Bing calling Obama on the phone to say “yo, what ARE you doing?” will get front page attention on every major newspaper. This way the Chinese get to have their cake without it collapsing on them. The US gets the message. And, I am sure, the US does not care.

Culturally the US and Chinese mindset are worlds apart. The Chinese are savers and conservative by nature fiscally (they also are superstitious), the Americans are care free, “it’ll all work out” type of thinkers – there is no long term.. Hell, the Chinese emperors buried thousands of ceramic soldiers and preserved aspects of their legacy. In May of 2009 they are thinking of 2030, whereas the Americans in May of 2009 are thinking of June.

In the end the Chinese will emerge stronger – this is certain. It happened the same way for the US in 1914 when it was purchasing all the gold it could. China is now doing the same. And where the US became a global leader in the 40’s because of it, China will dominate later on in this Century. Hold on to your Yuan’s, they might be worth something some day.

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Cheers Turn to Jeers as D-day Nears!

EUR

The Euro gained early in Tuesdays session only to give it back later on as the US markets opened and investors began taking profits and returned to the safe haven Dollar in advance of Thursday’s US stress test release and the European Central Bank’s decision on interest rates and stimulus. The past few sessions saw the Euro benefit from the positive sentiment on the street as traders took advantage of good economic news to come out from hiding behind the stalwart Dollar and Yen. However, as Thursday’s ECB meeting comes close, investors who traded the Euro in recent days are cashing in and taking cover once more. We, forex online traders can expect to see strength in the Euro should there be signs that the ECB will not adopt and aggressive policy – a topic that has been widely debated in recent weeks and seemingly dominated the market news.

At 11:00PM GMT, the Euro was trading down .4% to the Yen to 131.88, down 1.1% to the Sterling to .8831, down .4% to the Canadian Dollar to 1.567, down 1.2% to the Australian Dollar to 1.7926 and flat to the Swiss Franc after an up and down session to 1.5102.

USD

Federal Reserve Chairman Ben Bernanke said that it was his assessment that the economy is “turning the corner” and that the US could see growth in the second half of this year. This testimony in front of the US Congress contradicted his last month’s report when he declared that it could take until mid-2010 before any growth is seen. What should have been good news was muted by jitters over the release of the stress test this coming Thursday and an announcement by President Obama that he intends to raise business taxes by 5% in the short term to help cover the ever growing national debt. It is thought that 10 of the 19 banks that submitted to the US Treasury’s stress test will have to raise additional revenue in order to remain solvent, however to what degree these companies are struggling was the source of much debate on Tuesday.

At 11:20PM GMT, at broker trading boards, the US Dollar was down .7% to the Euro to 1.3315, up .22% to the Yen to 98.68, down .45% to the British Pound, down .2% to the Canadian Dollar to 1.1746, up .6% to the Swiss Franc to 1.1325, and down .8% to the New Zealand Dollar to .581.

AUD

The Reserve Bank of Australia held interest rates today at 3% after the members said that signs that the recession has grown in Australia are not present and in fact, there are positives that can be interpreted as strength. The Australian Dollar has benefitted lately as investors tested their risk appetite and moved to the higher yielding Aussie Dollar in order to lock in some larger profits.

At 11:40PM GMT, in addition to being up to the Euro, the Australian Dollar rose .45% to the US Dollar to .7421, up .65% to the Yen to 73.52, down .06% to the Pound to 2.034 and down .3% to the New Zealand Dollar to 1.2791.

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