Impact of a US Dollar crash

[Kimosabi]

I read the following article yesterday on the US dollar is heading towards it's support levels that haven't been breached for almost 30 years.

Perched Precariously on a Precipice

The dollar is no longer responding to traditional stimulants. This week, despite the apparently "hawkish" tone in the recently released Fed minutes, and trade deficit figures that were slightly less horrific than expected, the dollar nevertheless declined against just about every currency on the planet. As a result, it now teeters dangerously close to the edge of a very large precipice. Looming large is the 80 level of the U.S. Dollar Index which has stood as long term support for almost thirty years. This week, the Index broke below 82, and is sinking fast. When this critical level is breached, look out below. Without any support beneath it, the dollar could literally fall off a cliff.

The trajectory of the dollar is linked to America’s economic status in the world. Last week we learned, thanks in part to the strengthening euro, that the market capitalization of European shares now exceeds the market capitalization of American shares for the first time since before the First World War. At the current rate of appreciation, European shares will have a market cap 50% greater than American shares by the end of the decade. However, should the dollar decline turn into a free fall, this could happen much sooner.

For individual currencies, the British pound warrants particular attention as it approaches the significant two-to-one level against the dollar. The pound currently trades for about $1.99, and has not meaningfully breached $2.00 since the early 1980's. The euro, currently trading above $1.35, is bumping against its all time high of just under $1.37 against the dollar. The Australian dollar has already hit a new 17-year high and is perhaps a harbinger of things to come. The sole laggard among major currencies has been the Japanese yen (and to a lesser extent the Swiss franc), which has been held down by the infamous carry trade. When it unwinds (which would clearly be evidenced by a break below the 110 level), buckle your seat belt as all that will stand between the dollar and oblivion will be the Bank of China.

On that note, yesterday the Bank of China quietly dropped the bombshell that its foreign currency reserves, which had just passed the $1 trillion benchmark a few months ago, had swelled in the first quarter of 2007 to more than $1.2 trillion. At this rate, China will amass more than $2 trillion dollars in reserve sometime next year. I can only imagine how low the dollar would already be were it not for the massive foreign aid provided by the Chinese.

So far the Dollar Index has tested the 80 level five times in the past: 1978, 1990, 1992, 1995, and 2004. On several of those occasions it took massive, coordinated interventions by all the world’s central banks to rescue the dollar. However, given the enormity of today’s imbalances and the sheer number of dollars in foreign hands, such a bailout seems unlikely.

Perhaps the most significant warning sign is the break out in the price of gold. This is the first time the Dollar Index has hit this level with gold trading above $400 per ounce (although it might have been slightly above that level in 2004). Of course gold was considerably above $400 per ounce in 1980, but it was only about $200 per ounce in 1978. Though the dollar was under pressure in 1980, the index itself only fell to about 85. Currently, spot gold is trading at about $680 per ounce.

The strength in gold is also a good indication that this time around the U.S. dollar can count on little help from its friends. Rising gold prices reveal the suspicion with which many now view fiat currencies and central bankers’ resolve to keep them sound. Therefore, foreign central banks will be reluctant to take actions to further weaken their own currencies, ushering in greater domestic inflation and calling into question the soundness of their own respective monetary policies. Low gold prices gave cover to such inflationary interventions in the past, but today’s rising prices urge caution. As a result, the chances that the dollar can dodge another bullet are increasingly remote.

Despite the impending gravity of this situation, few show any worry. Perhaps the dollar will bounce from these levels and will buy us a little more time, but how much? When the support ultimately gives way all hell will break loose. A sharp decline in the Dollar Index below the 80 level will likely take down the bond, stock, and real estate markets as well. Since a lower dollar will exert additional upward pressure on already rising consumer prices, the ensuing combination of rising inflation, higher interest rates and lower asset prices will be a toxic mix.

http://www.europac.net/newspop.asp?id=8310&from=home

Now the question is, if the US dollar does collapse, what will be the impact on Australia and World Markets etc?

 

[CanOz]

Certainly looking pretty sick against the CDN$. A weak US dollar should drive their exports, which they really need.

 

[wavepicker]

I read the following article yesterday on the US dollar is heading towards it's support levels that haven't been breached for almost 30 years.

Now the question is, if the US dollar does collapse, what will be the impact on Australia and World Markets etc?

Lots of pessimism on the US Dollar ATM. Way too much bearishness for a crash to occur in the short to medium term. In terms of a secular trend however anything is possible.

This is the sort of sentiment seen toward market bottoms, IMO the commodities bull is in it’s last stages of the campaign and should terminate this year. Sure will continue to make new highs(even in Gold and Silver) , but if one studies the US Dollar Index closely (which is a measure of the US Dollar performance against a basket of currencies), it is clear that this last move down is a creeping/struggling trend. This market is churning and should start a multi year countertrend. Once again the majority will be projecting the current trend into the future because that is what has happened in the future, once again 95% of then will get burnt like most traders did in the dot.com boom.

Cheers

 

[Uncle Festivus]

Wavepicker, maybe some trends are terminal?

 

[bvbfan]

Watch for a rally once the Yuan is revalued as money floods out of China back into USD for a short term spike (rally) that may be last chance for everyone else to offload their USD holdings.

 

[drillinto]

Jim Grant's opinion on the US Dollar

http://www.ft.com/cms/s/f2f3a8a8-0f12-11dc-b444-000b5df10621.html

 

[theasxgorilla]

Now the question is, if the US dollar does collapse, what will be the impact on Australia and World Markets etc?

This has been a coming and going speculation for years now. And still no collapse. Depreciation against a many other currencies including the AUD, EUR and CAN, but no collapse.

I can say what I won't be doing. Holding any medium to longer term positions in the US market without a USD hedge. If you did this in the S&P500 for the last 3 years (investing from the EUR zone) and brought your 'profits' back into the EUR zone you'd have ended up with the big Orbison (zero) due to USD depreciation.

 

[nizar]

This has been a coming and going speculation for years now. And still no collapse. Depreciation against a many other currencies including the AUD, EUR and CAN, but no collapse.

I can say what I won't be doing. Holding any medium to longer term positions in the US market without a USD hedge. If you did this in the S&P500 for the last 3 years (investing from the EUR zone) and brought your 'profits' back into the EUR zone you'd have ended up with the big Orbison (zero) due to USD depreciation.

Hi ASXG.

Definately hedging currency risk will be something i will be looking into as i start developing a system to trade long/short US Stocks.

Coming from the Euro zone, i certainly hope you been trading the DAX!

 

[explod]

At a significant point in world financials a fresh look at the world's reserve currency is appropriate.

At the head of this Thread, introduced by Kimosabi back on the 16th April 07, the lead article has indeed proven to be accurate in it's observations and forcasts. Since that date the US$ index has fallen more than 12%, it is in the process of completing a double head and shoulders, and poised this week to test it's all time low of 70.69 recorded 17th March 08

From my view, a french curve placed on the chart since June 06 (from INO which wont post for me) would indicate that the Index fall is about to accelerate. The fall on Wall Street Firday night, and the tremors going through the financial world as we speak may confirm this outlook.

 

[BentRod]

Does anyone have a current long term chart of USDX?

 

[Shane Baker]

Does anyone have a current long term chart of USDX?

Here tis

 

[BentRod]

Thanks very much Shane.

 

[Kauri]

Just for interests sake..
All conjecture.. until it proves up one way or tother.. but helps explain one of the factors that may be affecting the FX markets..
There has been a lot of talk over the past 24 hours about a number of technical analysts calling for a turn lower in the US dollar index. Analysts who follow Demark say that the DXY completed a 13 count two days ago and has started a "9-count" higher. A break of the "9-count" higher would occur if the DXY made a daily close below the close four days previous. The close four trading days ago was 76.80 so a daily close later today below that level would negate the "9- count" and confirm that the 13-count high at 77.62 is a major top and a significant turn lower is underway.

Cheers
..........Kauri

 

[kosai]

I'm surprised this thread wasn't revisited with all of the recent events. It's very clear now that there are major cracks in the financial system of the united states and it makes this dollar crash scenario far more likely to occur.

When you even consider the fact that Alt-A and Option ARM loans are yet to even hit the banks, it's very clear that this is one they can't recover from.

 

[gfresh]

yes..

Latest USD chart for visual representation. They went on about the oil price rising the largest ever in one day, but they gave scant mention to the $USD falling the furthest I can see in the last 3 years against other currencies.