The following financial entities do NOT want to see the Dollar go down any further:
There are actually a few people who SAY they don't want to see the US Dollar go down (any further), though they really do:
A month ago, Alan Greenspan spooked global currency markets with remarks to the effect that global holders of $US Dollars and $US Dollar "assets" would stop buying and maybe even start selling unless the US addressed its trade and budget deficit problem and/or offered interest rates commensurate with the perceived risk of continuing to hold US Dollars. Then came the official "threats" from both China and Japan (the world's two biggest foreign $US holders) that they were "diversifying" their foreign exchange holdings and were actually thinking of actively starting to sell $US unless the US government and Central Bank took steps to curb their borrowing. These threats were quickly denied by other "official" spokesmouths in these two countries. Last Friday (December 3), the $US index plunged 0.99 points to 80.98 - the lowest point yet in its bear market. Gold closed at a new bull market high of $US 456.00.
The low closing level for the $US index at the bottom of its last bear market was 80.08 in February 1995. Our $US data doesn't go back much further than that. But Dr Richard Appel (in 321 Gold) states that in his $US index charts which go back to 1972, the index has tested the 80 level several times but has only once and very briefly penetrated below the 80 level.
A $US index chart going back to 1972 is looking at the entire history of the world "floating exchange rate" system. That system began in 1973, about a year and a half after President Nixon closed the "Gold window" in August 1971. Remember, for that entire period, the US Dollar, unconvertible into anything and unbacked by anything (except the full faith and credit of the US government), has been the world's reserve currency. In full context, the 80 level on the US Dollar index becomes the most important single support level on global markets.
By the end of last week, it was being seriously threatened.
This week, of course, has come the first signs of a $US index rally, fairly anaemic so far, but nonetheless there. On the other side of the equation, oil is down to just under $US 41 a barrel. Gold has been hit to the tune of $US 22.00 in a week, out of all proportion to the $US index rise. Gold stocks have taken a pounding. The commodity currencies, especially the Aussie and Canadian Dollars, have dived. Silver has been smashed flat.
After five weeks of a rapidly falling US Dollar, after the confirmation of a second leg on Gold's post 2001 bull market, and after two weeks of increasingly apocalyptic warnings about the imminent fate of the US Dollar and the US economy from the world's mainstream financial press (including the mainstream US financial press), a line has been drawn in the sand. That line is just above the most important support point on world markets, the 80 level on the $US index, the level which it has NEVER gone below (for long) in the 31 year old history of the global fiat money backed by the US Dollar system.
Almost no-one in the world wants to see the US Dollar breach that support zone because they KNOW, or strongly suspect, or merely have an increasingly uneasy feeling about, what that might mean for the global economic/financial system. To go from a commodity currency (with precious metal backing, however flawed) system to a fiat currency system is simple. To reverse the process is anything but simple. It has been done, with great strain at great cost, before in history on a one nation basis. The British did it (or at least a variation of it which brought the currency back to full weight coinage) under Gresham in the reign of Elizabeth I. The US did it with the redemption of the Greenbacks after the Civil War. It was even done, for a few years, by Germany after the hyper-inflation of the early 1920s, but only with huge foreign loans.
To do it now, in the US or anywhere else, in the face of three decades plus of rampant credit creation, deficit spending, would not be impossible, but the financial/economic ructions which would inevitably occur in the "transition" would be huge and potentially politically divisive to an almost or completely fatal degree.
The rest of the world knows this, having all at one time or another (many of them repeatedly) suffered the consequences of the irresponsible financial "management" which inevitably comes when the discipline of Gold is removed. The US, and in particular the US government, doesn't know it. With the exception of the stock market crash of October 1987, they have not suffered any serious consequences of their own profligacy for almost a quarter of a century - ever since the end of the 1980s recession in 1982.
The first Bush Administration is the most profligate by far in the US history of the fiat money era. For almost the whole of their tenure, and especially since 9/11, they have been operating on the basic assumption that what the rest of the world might think of their actions doesn't matter, because the rest of the world won't DO anything about it. They also operated on the assumption that the American people wouldn't protest as long as they assured them that they were "safe", kept consumer prices low, and kept at least one investment market bubbling happily along. When Mr Bush was re-elected on November 2, both he, and more important, his government cohorts and political advisors, concluded that they were right - on BOTH counts.
Mr Bush and his financial officers (Mr Snow and Mr Greenspan) know that the least painful way to "get rid" of the gigantic debt overhang they are labouring under is to "devalue" it away by a lower US Dollar. As the US Dollar falls, it is US creditors who take the losses, not them. The alternative is to defend the Dollar by winding back or ending the deficits and offering interest rates commensurate with the state of their indebtedness. But that would put the losses onto them. Worse, they would stand unable to afford their global empire.
Mr Bush and Mr Snow - we're not so sure about Mr Greenspan but his hands are tied - are convinced that no matter how profligate they get, no matter how much of the world's savings they demand to fund their policies, and no matter how low the Dollar goes, the rest of the world will keep on doing what they have "always" done, they will go along. They have not been proven wrong - yet.
To show how acute the situation has actually become, consider two US economic statistics released over the past week
First, the Federal Reserve has reported that over the third quarter of 2004, the debt levels of US households rose at a 9.1% annualised level. They also reported that the pace of this debt rise was about twice the pace of the rise of US households' net worth. Don't forget, this "net worth" is being steadily eroded both by the fall of the Dollar and by increasing US prices. The debt's are not.
Second, as part of the November PPI report, it was stated that US "core intermediate goods" prices are up 8.0 percent on the year, the fastest rise since 1981. 1981 was the HORROR year in the early 1980s US recession. Lending rates at US banks spent most of the year at or above the 20% level. The Fed Funds rate hit a high of 21% in March and remained between 17.5% and 20% for half the year. Compare that to the rates now.
On October 18, spot future Gold got back to $US 416.20, the level at which it started the year. It went on to post a high of $US 456 last Friday, December 3. This week, it is down $US 22.10 to $US 433.90. The big dive of $US 14.80 started in Asia on December 8 and accelerated when trading hit New York as the speculative longs ran for the exits. The rest of the world is not yet ready to drag the US Dollar down around their own ears. Given the policies and actions of the new Bush Administration, we don't think they will wait too much longer. The course of the $US index rally and the Gold correction will tell the story. Don't forget though, Gold HAS confirmed a new leg in its post 2001 bull market. It also has SOLID support at the previous (February - April) 2004 highs around the $US 430 level.
Unlike the US Dollar and the rest of the world's fiat currencies (yes, including the Euro), Gold doesn't have to make any "transitions". It already is money and has been for nearly 3000 years.