The Dollar Spirals Down, Hits Lowest Point Since 2014

What will the Fed do?

The US dollar has dropped 2.0% in the past five days, 2.4% over the past month, 4.1% year-to-date, 5.3% over the past three months, and 9.4 % over the past 12 months, according to the WSJ Dollar Index. At 82.47, the index is at the lowest level since December 25, 2014:

The index weighs the US dollar against a basket of 16 other currencies that account for about 80% of the global currency trading volume: Euro, Japanese Yen, Chinese Yuan, British Pound, Canadian Dollar, Mexican Peso, Australian Dollar, New Zealand Dollar, Hong Kong Dollar, South Korean Won, Swiss Franc, Swedish Krona, Singapore Dollar, Indian Rupee, Turkish Lira, and Russian Ruble. The currencies are weighted based on their foreign exchange trading volume.

Whatever the reasons may be for the decline of the dollar against this basket of currencies — everyone has their own theory, ranging from the much prophesied death of the dollar to Treasury Secretary Steve Mnuchin’s actively dissing the dollar at every opportunity he gets — one thing we know: The decline started in late December 2016, after the index had peaked at 93.50. And it has not abated since. With the index currently at 82.47, it has fallen nearly 12% over those 14 months.

The dominant factor in the decline of the dollar index is the strength of the euro, the second largest currency. Over those 14 months, the euro, which had been given up for dead not too long ago, has surged 20% against the dollar.

The decline of the dollar is another indication that markets have blown off the Fed, similar to the 10-year Treasury yield falling for much of last year, even as the Fed was raising its target range for the federal funds rate.

The Fed keeps an eye on the dollar. A weak dollar makes imports more expensive and, given the huge trade deficit of the US, adds to inflationary pressures in the US. Over the past few years, the Fed has practically been begging for more inflation. So for the Fed, which is chomping at the bit to raise rates further, the weak dollar is a welcome sight.

Conversely, a surging dollar would worry the Fed. At some point it would get nervous and chime in with the chorus emanating from the Treasury Department and the White House trying to talk down the dollar. If the dollar were to surge past certain levels, and jawboning isn’t enough to knock it down, the Fed might alter its monetary policies and might back off its rate-hike strategies or it might slow down the QE Unwind.

It would never admit that it is reacting to the movement of the dollar because that would be equated with firing up the currency war. But it would not be hard to come up with a pretext for changes in monetary policies. It wouldn’t be the first time.

But the dollar weakness is playing into the Fed’s hand and encouraging the Fed to move forward with its rate hikes and the acceleration on automatic pilot of the QE Unwind.

In the US credit markets, the Fed’s monetary policy shift is finally taking hold. It just took a while. Read… “Financial Stress” Spikes. Markets, Long in Denial, Suddenly Grapple with New Era

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  93 comments for “The Dollar Spirals Down, Hits Lowest Point Since 2014

  1. Jaco
    Feb 16, 2018 at 2:26 am

    According to Clive Maund they’re trapped.

    I think the dollar is likely to fall for a couple more weeks into a DCL and then bounce for a month or so,ultimately to fall into oblivion.

    And when I say oblivion, I mean it’s going to break the lows of 2008.

  2. JM Keynes
    Feb 16, 2018 at 2:36 am

    – Between 2001 and mid 2008 the USD went down against a bunch of currencies (including the EUR). The EUR/USD went up from 0.80 up to 1.60. It meant that a US consumer, compared with a Eurozone consumer, saw the purchasing power of his/her USD drop by 50% in that same timeframe. And the people in the US are still wondering why the financial crisis started in the US ???
    – I expect the FED to raise rates because the 3-month T-bill rate went above 1,5%.
    – The Trump taxcuts and the increased military budget mean higher US spending and as a result a rising Trade Deficit, Current Account Deficit and a higher Capital Account Deficit. And the overall outcome is a weaking USD and higher (price) inflation for US consumers. In that regard I think it’s very likely that the next financial crisis will/could start in the US again.

  3. William Smith
    Feb 16, 2018 at 3:27 am

    Isn’t there a lot of large scale currency speculation going on which makes this whole thing very complicated? And then there is china who owns a whole lot of US paper and assets (which they bought with the proceeds from the corporate “globalization” jobs export program). Their inscrutable position on all of this would be of great importance. They can’t afford to let the US tank and consequently reduce the value of their holdings, and they also want to continue their wealth extraction program by continuing exports to the US. So, surely, they would be pulling some fiscal strings to adjust things in line with their long term strategic goals. And if someone says that they ain’t big enough, I would like to see a proper/actual/real analysis of just how far the chinese economic tentacles go (including disguised proxy holdings). It should be possible to do within a trillion dollars or so? Unlike the dolts on Capitol Hill, they are very smart and have goals that go across generations, not just 4 years.

    • Drango
      Feb 16, 2018 at 9:55 am

      It’s entirely possible for China alone to bring about a weak dollar, if only temporarily. The Chinese New Year is always a time when China needs to pull some strings to increase dollar liquidity. But listening to America’s allies whine about a weak dollar can be too much to take. How did we get to the point where these countries feel that they are entitled to trade surpluses with the U.S. as a matter of right?

      • Nick Kelly
        Feb 16, 2018 at 7:43 pm

        China offers it, Americans buy it. No one forces them.
        You might as well blame the US as China.

        Few facts about Chinese imports:
        Biggest category is consumer electronics at 27 percent.
        The US was out before China was in. Last US TV Zenith 1995.
        The baton passed to Japan.
        Now Japan is getting out,Toshiba exiting TV.

        When the LED panel is supplied to the assembler of a 32 inch set, there is less profit than a Starbucks latte. This is not a biz to chase.

        Next category, 19 percent: apparel including shoes.

        For the wage required to not leave the consumer in shock, Americans are no more likely to sew clothing panels than they are to pick their own lettuce.

        Then comes a bunch of stuff that is best categorized as Walmart stuff. Toys, cheap textiles, cheap china. All low profit.

        Without really big tariffs, none of this is coming back to the US.
        None of the manufacturing that is. Lots of the profit does stay in the US, because it’s US outfits that are having the stuff made in China, Apple being the poster child.

        You could just slap a 10 percent tariff on everything, which would be no where near enough to have this stuff made in the US, but it would bring in some money. You could charge them for the privilege of entry to the market: or what some would call a shakedown.

        • William Smith
          Feb 16, 2018 at 10:37 pm

          It is a bit disingenuous to first systematically destroy all local manufacturing (by a thousand cuts), then to state that “it is their (consumer’s) CHOICE to buy chinese” : which are now the ONLY things available in the shops. On what planet is this a “choice”? A choice between cheap crap and no crap at all is not a choice. It is a dictated outcome.

          Then, when much wealth has bee transferred, the other party has massive financial advantage and can play one’s own economy like a fiddle by rigging FOREX etc. If they have lots of paper and dollars (bought with proceeds from their exports), then can (dump) sell or buy as they see fit to manipulate the exchange rate.

          And yes, it is the US that should look to itself for inviting the wolf in to supper. This is why I made mention of certain “dolts”. It is quite possible that the US even helped to create the wolf in the first place by allowing short sighted corporate “globalization” since the 70’s.

          And you talk about “shakedown” : just *you* try to land goods in the sainted china without the proper bribes and import duties and see just how “unshakedown” they are to you. Who is shaking whom down? Also just try to purchase land there as a foreigner who is not controlled by their government and see how far you get. The US thinks in reporting quarters while china thinks in centuries, and they have been around a hell of a lot longer than most countries. They also value intellectual capacity and not a certain reality family beginning with “K”. The same might also be said of Russia too but they (probably) don’t have the financial clout (yet) to affect FOREX the way china does.

          This little rant will probably get cut because of the 5% rule, but this stuff makes me mad. It is in effect “victim blaming” (the victim being the consumer).

        • d
          Feb 17, 2018 at 3:07 pm

    • d
      Feb 16, 2018 at 4:55 pm

      More like 4 generation’s.

      For the West those goals are not good.

      • Drango
        Feb 17, 2018 at 8:45 pm

        Or maybe China’s economy is nothing but the biggest financial bubble in history, blown by communist party hacks who think the rules of finance don’t apply to them. The Chinese government is far more worried about a financial crisis than the rest of the world. And when it’s over, all they will have to show for it will be ghost cities and a billion very pissed off people.

        • d
          Feb 18, 2018 at 2:34 am

          “Or maybe China’s economy is nothing but the biggest financial bubble in history, blown by communist party hacks who think the rules of finance don’t apply to them. ”

          A lot of those CCP Mafia State officials do not understand those rules.

          China is like Russia, the Administrations change, but not the core attitude or objective.

          Non chinese are still all Barbarians, and Vassals of china.

          china IS the middle kingdom. Which the world revolves around, should pay TAX TO, and is subservient to.

          That’s still how they think.

          The Vietnamese will tell you that china invaded and occupied Vietnam for nearly a 1000 Years. The chinese will tell you Vietnam was a willing Vassal State of china, And still should be.

          The Confucian way, is if possible, to talk, if necessary for generations, until the opponent eventually gives you what you want, the chinese call this “Negotiations”.

          In Negotiations with china, china nearly always gets what china wants, as it will continue to negotiate with out changing its position, until it does, or there is war.

        • george mcduffee
          Feb 18, 2018 at 2:33 pm

          At least China will have the “ghost cities.” China will also have their very considerable rail network and the many hydroelectric and flood control projects.

          What will the US have when it goes “pear shaped?” Municipal bond funded arenas and casinos, and government pension funds stuffed with worthless paper assets.

        • d
          Feb 18, 2018 at 3:51 pm

          “flood control projects.”

          Those projects will soon be fighting the tide, many of the ghost cities will do the same as Jakarta, subside, and fall over, as they are all on low lying land.

          Much of southern china and Vietnam will be underwater in 50 years.

          What will destroy this incarnation of china first, its pollution, or its untenable economic system (Again).

          Again china is wreaking havoc on the planet, this time some of the effects will last for thousands of years. Everybody else gets to pay for it (Again).

          History repeating. With a different PERMANENT tail twist.

  4. d
    Feb 16, 2018 at 5:12 am

    If it breaks 80 that would be a concern, it wouldn’t surprise me if it went there (or close to it), it hasn’t touched base with major support since 02/14.

    Probably around or after mid terms.

    This is after all a mid term year, with a new FED Head.

    Before one even considers all the P 45 issues.

  5. Rates
    Feb 16, 2018 at 6:10 am

    This is a repeat of the prior crash. Anyone selling dollars now will rue it when things started to collapse.

  6. Corbin Dallas
    Feb 16, 2018 at 6:14 am

    Umm its obviously because we are a leading light to the world with our world-class democractic institutions, health care and infrastructure!!

    Realistically I would bet because everyone is seeing the US go down in flames, gun hungry kids murdering each other, police shooting black people in the street, while the global militarization continues apace. Why would anyone “bet” on a currency of such egregious, explicit death?

    • Frederick
      Feb 16, 2018 at 7:31 am

      Yup it sure isn’t looking good lately The rule of law has been absent for awhile now

    • IdahoPotato
      Feb 16, 2018 at 10:58 am

      Don’t you worry. The dude from Alabama says criminalizing pot use will fix everything.

    • Petunia
      Feb 16, 2018 at 11:01 am

      Black on black crime has been a big problem for decades now, especially bad since the 70’s. Most of the crime is based on the disintegration of black families, encouraged by the War on Poverty of the 60’s.

      As a Hispanic, I have never understood black support for illegal immigration. Illegal immigration has hurt them the most and they still support it.

  7. James Levy
    Feb 16, 2018 at 8:06 am

    In the British context this was historically a contest between industry (weaker pound) and finance (strong pound) which, after WWI, finance won every time. It is always tricky to translate from one historical context to the next, but I can see the same dynamic playing out in America right now, with industry and the extractive businesses wanting the dollar down while finance and the investor class most likely wants it strong. I expect The Donald and The Fed to wander around trying to find some goldilocks solution but not finding one. At that point it will be a question of which policy will make Trump look better with voters in the short run (he cares even less about the long run than most politicians, as his entire life has been built around closing the deal right in front of him and then moving on like a shark). There is also the psychology behind the word “weak”, which will bug him. But if job growth is flat and the trade and budget deficits continue very high, he may have no choice but to adopt the weak dollar position (much as he will loath that word being in any way associated with him) to give him any chance for reelection in 2020.

    • Petunia
      Feb 16, 2018 at 11:11 am

      I’m your average American. I’m not planning a European Tour, my next vacation will be a weekend to a nearby city. I’m trying to buy American, even when that means second hand. The majority of disposable income goes to local entertainment or services, the movies or the hairdresser, with an occasional dinner out.

      In other words, the weakness of the dollar doesn’t matter to most of us. When we can’t afford it, we don’t buy it, or buy it later if we can.

      • IdahoPotato
        Feb 16, 2018 at 12:32 pm

        A weak dollar equals higher prices for imports – especially food and gasoline – affecting everyone. It also signals the anticipation of economic weakness.

        • TomYumGoong
          Feb 17, 2018 at 8:12 am

          Weak currencies and trade surpluses are how emerging economies became developed economies. The problem, I believe, is that it is a one way road. Once an economy has become highly developed, has off-shored most factories, and exports primarily fiat currency, it is not clear to me that the process can be reversed by weakening the currency. In no small part, that is because the minimum wages in America are twice per HOUR than the global median wage per DAY. Further, the US no longer has the monopoly on capital that it had at the end of WWII.

      • James Levy
        Feb 16, 2018 at 12:34 pm

        It can show up in gasoline prices. The whole Arab Oil Embargo was not a response to the Yom Kippur War, but to Nixon closing the gold window. The war was an excuse to reset oil prices in relation to the weaker dollar. Then Kissinger made the most of a bad situation by giving the Arabs all the money they could swallow so long as they refused to take any currency but the dollar to buy their oil, thus forcing every country on earth to use dollars and boosting the power of Washington. Thus the Washington-Riyadh axis around which the global economy spins (and why when 15 Saudis, led by another Saudi, wiped out the Twin Towers, we bombed everyone else but not them).

  8. Mike Ra
    Feb 16, 2018 at 8:08 am

    I think it may be more related to what is appearing to be a reckless disregard for deficits by all of the US political “leadership”.

    It is as though the light switch (of caution) has been turned off for good now. Where were the fiscal hawks on Trump’s tax bill?

    And look what has now happened to the debt debate; doesn’t exist much anymore as they now suspend the debt limit for a year or two. And this was started in Obama’s final years, essentially to allow for greater deficit spending to help Democrats win the election.

    So both parties are now all in.

    Trillion dollar deficits (and more) from here on out should make all of us very, very scared (and angry). Those with wealth my simply be voting with their currency.

    • California Bob
      Feb 16, 2018 at 10:40 am

      It’s clear now there never were many, if any, true ‘fiscal hawks.’ The so-called ‘fiscal hawks’ only used their ‘concern’ for the deficit/debt to hamstring political opponents (read: Democrats).

      • Drater
        Feb 16, 2018 at 11:32 am

        Fiscally it seems Democrats have become Socialists and Republicans are the new Democrats…

        • Kent
          Feb 16, 2018 at 12:29 pm

          I’m a Republican. And I will freely admit that Republicans since Reagan have been far more fiscally irresponsible than Democrats. Cutting taxes is fiscally irresponsible without corresponding cuts in defense spending. None of that means I would vote for Hillary though.

      • TomYumGoong
        Feb 17, 2018 at 8:20 am

        It has always been clear to me that the differences between the two parties were superficial. The most important aspect has always been that they were both “Big Government” parties.
        The difference between them has never been more than a percent or two in spending.

    • Petunia
      Feb 16, 2018 at 11:19 am

      The debt limit was always Kabuki theater for the masses. Look at what they do, not what they say. There was never a debt limit fight that didn’t end with them raising the debt limit.

      Constitutionally there is no such thing as a debt limit in the US. The congress has the power to spend whatever they want and they have always had that power. The new budget is only bringing back the transparency that has been lacking, due to all the theatrics.

  9. aqualech
    Feb 16, 2018 at 8:10 am

    I am seriously beginning to doubt the FED’s control over interest rates and exchange rates. Both international bond and forex markets are larger than what can be steered with FED-dictated lending rates or sane amounts of QE. Maybe the globe is waking up to the US imbalances and is barfing US bonds and bucks by the boatload.

    Maybe the FED is too.

  10. Feb 16, 2018 at 8:32 am

    Race to the bottom all Fiat currencies going down but the dollar going down faster than the others at the moment and higher rates are on the Horizon to keep it from going down too fast .

    • ZeroBrain
      Feb 17, 2018 at 10:47 pm

      Isn’t the Fed caught between a rock and a hard place? If they allow rates to rise, that increases interest on the 20 trillion debt by 200 billion per 1% interest rate hike (albeit with those increases delayed by bond maturity). So basically they can’t increase them beyond a few percent, as I see it, which may not be enough to stop flight from the dollar.

      Wolf never seems to address that, it seems that he just takes at face value that they’ll continue increasing. (Or maybe he does address it; I don’t read every article).

      • Feb 17, 2018 at 11:45 pm

        This issue won’t show up in a significant way for a while. Much of the US debt is longer-term debt. That portion of the debt won’t be impacted by higher rates until these bond issues mature and are replaced with more expensive new bond issues. This is happening every month, but only little by little. On the other hand, short-term bills roll over quickly, and new ones will cost the government more.

        If the cost of the entire $21 trillion in debt rises on average by 1 percentage point, it would amount to $210 billion a year in additional expenses. I have not done the math as to when we will see this, but not this year. Maybe next year. Or maybe year after next year. By then the US national debt will grow well over $1 trillion a year for other reasons. So add that $210 billion to it. Five years from now, the additional interest cost will be more significant.

        In my foggier moments, I have the suspicion that the Fed is trying to force Congress to open its eyes to this problem and do something about it before it gets even much much worse.

        • ZeroBrain
          Feb 18, 2018 at 1:19 am

          I see, thanks. This prompted me to look up the maturity distribution for Treasurys (correct spelling, to my surprise) and just eyeballing it, perhaps half mature in 5 years.

        • Feb 18, 2018 at 9:56 am

          I hate that spelling and rebel against it for as long as I can. It hurts my eyes. I might have to throw in the towel some day. But English grammar, diction, and spelling are determined by usage. After a while, our descriptive grammar and dictionaries adjust to spoken and written realities. If enough people spell it “Treasuries,” eventually even the NYT will give up. And then “Treasuries” will be anointed as the normal usage, with “Treasurys” being labeled “archaic” usage. But I’m not sure I live long enough :-]

          On a more serious note: Many long-dated Treasury securities (a way around the ys) were issued before yields plunged this far, and they’re still maturing and will continue to mature, and they will be replaced with securities with LOWER yields that are currently in effect. On the maturity schedule, you can look up the coupon rate.

          For example, on May 15, $7.7 billion of a 30-year bond (CUSIP 912810EA2) matures with a coupon rate of 9.125%. Coupon is not yield, but it approximates the cost of the bond to the government, depending on whether it was sold at a slight discount or premium at the auction 30 years ago, when yields were much higher. This bond may be replaced in May with a 30-year bond that may yield in the 3.5% range. So the cost to the government will actually fall sharply.

          In other words, in 2017 still, all 10-year and longer-dated securities that mature will be replaced with securities with LOWER costs to the government. The effect of this will fade out starting in 2018: in 2008 yields dropped, with the 10-year edging below 4% for the first time. In 2009, yields plunged, and all securities issued in 2009 and later will be replaced by HIGHER yielding securities.

        • d
          Feb 18, 2018 at 2:39 am

          “In my foggier moments, I have the suspicion that the Fed is trying to force Congress to open its eyes to this problem and do something about it before it gets even much much worse.”

          I also have those thoughts along with will FED go past 3% BEFORE THEY 0 the Balance sheet.

          A republican congress under P 44 will have no interest in that matter.

  11. raxadian
    Feb 16, 2018 at 8:54 am

    *Treasury Secretary Steve Mnuchin’s actively dissing the dollar at every opportunity he gets*

    How come the idiot still has his job?

    No wonder some people say that the US biggest enemy is themselves.

    • James Levy
      Feb 16, 2018 at 9:34 am

      Trump is rich (although not nearly so rich as he pretends) but has never been well connected to the Power Elite (those, as C Wright Mills argued, have can and do make the decisions for society and the nation). Thus, when he came into office he picked a rogue’s gallery of very rich but also not well connected people (and generals) to staff his administration. Mnuchin is the exception. He is Trump’s channel to Wall Street, and Trump needs that to govern. Given the outsized importance of Finance Capital, it would be incredibly difficult for any presidency to function without some means of keep Wall Street in the fold (Clinton, Bush, Obama, and now Trump all need their Goldman guy close to hand). So Mnuchin will stay on until another Wall Street insider can be convinced to replace him.

      • raxadian
        Feb 16, 2018 at 1:18 pm

        He is insulting the US currency at every chance he gets while working for the US government. The guy is far from being untoucheable and there are more than one person willing to take his place.

        In any other country of the world, he would get replaced.

        Truly, americans must be crazy.

        • george mcduffee
          Feb 16, 2018 at 8:32 pm

          With the operative word being “internally,” the logic exhibited by the majority American socioeconomic structure is internally logical and coherent, that is not “crazy.”

          The problem is that this standard American [ideal] socioeconomic structure is increasingly less isolated, and “real world” exogenous factors, from weather [hurricanes] to foreign economic and socioeconomic phenomenon such as ISIS, the mid-east oil wars, European separatist from Brexit to Catalonia, failing/ed nations such as Venezuela, etc. etc. are all having increasing effect.

          This is not only financial, but because of the Internet, these phenomenon are seen in color and real time, albeit with considerable “selection bias” and “spin.” Indeed, in many regions, primarily because of the influx of huge numbers of legal and illegal refugees and immigrants, these previously external [denied/ignored] problems [many caused by American governmental action/policy, for example NAFTA] have become internal and real domestic US problems.

          Americans in general are not “crazy,” but are suffering rapidly increasing amounts of personal angst, incongruence [Carl Rogers 1950s], cognitive dissonance and denial as the external factors intrude into their “reality.”

    • Frederick
      Feb 16, 2018 at 10:31 am

      Because a weak dollar is their goal Obviously

      • Feb 16, 2018 at 11:48 am

        Amen ! Again I say, Amen !

        That´s how the so called ¨idiot¨Mnuchin keeps his job, he is doing his boss´s bidding.

        Which is how we all keep our jobs, unless we are F-you rich.

  12. C Jones
    Feb 16, 2018 at 8:56 am

    If you chart US CPI against (inverted) trade weighted US dollar you get a clear and predictable result … when the currency rallies, inflation falls, and vice versa. Saying a weak currency will boost inflation is really just stating the same point twice.

    What will the Fed do about it? Not a lot I suspect. But I understand the politics of their position in that they will go along with the crowd until it becomes problematic since if they can get another rate hike in here or there it ‘gives them more ammo when they need to cut again’ (how ridiculous).

    For a related example have a look at what the Bank of England have (not) been up to the last decade…

  13. wyliecoyote
    Feb 16, 2018 at 9:23 am

    My take is that now is the safest time to buy US equities in a decade because they’re no longer being propelled higher by the whims and policies of politicians and fed bankers but by the destruction of the US dollar as a result of those whims. Don’t believe me? Take a look at the Venezuelan stock market.

    • Agnostic
      Feb 16, 2018 at 10:06 am

      Yes Wylie but historically stock markets haven’t kept up with gold in times of hyperinflation. Stocks can be a quasi tangible asset–KCS perhaps more than Snapchat. Just watch out for the DTCC and holding stocks in street name, if the system goes down you may have only an unsecured claim against a bankrupt brokerage house. Buy through direct registration–if you can.

    • BTilles
      Feb 16, 2018 at 10:47 am

      I think the 84% month over month inflation rate in the data below your chart may have something to do with that market’s vertical ascent.

    • Feb 16, 2018 at 12:04 pm

      Using a country that is in the throes of HYPER-inflation as an example of a rising stock market is not sound analysis. The hyper-rising stock market prices are symptomatic of the hyper-falling currency prices (value).

      In the end, being in the stock market is better than holding currency, but the ¨investor¨ STILL LOSES .

      Yet your point may be a very good one indeed. It is possible that the stock market ¨shirt¨ is the least dirty shirt in the laundry hamper. And thus the best place to keep your money during a national hyper-inflation .

      • Feb 16, 2018 at 6:55 pm

        The Question in the Hyper inflated countries with a hyper inflated stock market is if you would be able to get anything for your money when you get out . I also wonder if it happened in the U.S. is if there would be any gold or silver for sale at ANY Price ????

    • TomYumGoong
      Feb 17, 2018 at 8:27 am

      You might want to take a look at the black market exchange rate graph as well. Three years ago, it was 200 Bolivars to a $. Two years ago, it hit 1,000.
      Today it is 250,000.

  14. Bead
    Feb 16, 2018 at 9:28 am

    This must be due to Japan’s demographic success. Or Europe’s better QE. I will suggest a counter-intuitive idea that the U.S. Fed is now being considered insufficiently committed neo-Keynesian and that the very notion of an attempt to escape QE is poor form. Admittedly our Congress is ridiculous but no more ridiculous than legislatures elsewhere.

    Maybe it’s Trump’s fault.

  15. mvojy
    Feb 16, 2018 at 10:09 am

    At least we have 261,498,926 troy ounces of gold in our reserves which translates to around $350 billion to back the M2 money in circulation of $13.8 trillion. Good thing the feds double the money supply back in 2008 and the Fed did a few trillion worth of QE.

    • Frederick
      Feb 16, 2018 at 10:33 am

      Do we? Many doubt that we have much or any at all Why no audit allowed and why all the trouble repatriating Germany’s bullion?

      • Feb 16, 2018 at 12:53 pm

        You are correct.

        Audits are de rigueur .

        They have tried to fool us with ´walk-by´ visual inspections as a substitute for audits. No real audit has occurred in over 50 years, nor will an audit ever be allowed. The damned FED has custody of the gold belonging to U S Citizens.

        There are many excellent analyses of U S Government shenanigans w.r.t. vaulted gold bullion over the decades. For example, Gold in Ft. Knox had its description in FED reports changed to ¨Deep storage¨ gold, which was understood to mean this — ¨a promise to return the gold (by the buyer, or leaser, or borrower) and the gold to be returned was currently in deep-storage, underground, as yet un-mined.¨

        There is no lie too outrageous for U S Government agencies to sell to the public.

        My own research, and the research of others demonstrates this conclusion :

        (1) There are very few, or even no ¨Good Delivery¨ bars in Fort Knox or West Point. GOOD DELIVERY is the international standard for gold bars.
        (2) What remains in Fort Knox are some few tens of millions of Gold Coin gold (not Good Delivery) remaining from the FDR gold confiscation in 1933.

        Someday those antique gold coins will need to be refined into .999 Good Delivery gold, and then recast into bars. Until then they have no international utility.

        • Nick Kelly
          Feb 17, 2018 at 12:51 pm

          This difference in the form of the gold is an issue the parties could deal with.

          Check the price of an antique gold coin against melt.
          Properly minted coins unalloyed almost always bring a higher price than bars even if they’re new.

          The Good Delivery bar is needed for the London vault where bars are physically wheeled from one country’s pallet to another. This may be the only place where your gold HAS to be delivered in that form. The warehouse is not staffed to deal with it any other way.

          A offer from the US to China or anywhere to settle a debt in antique US gold coins (at the bar price) would met with disbelief but not refusal.

          A peculiarity of the gold trade as a commodity is the huge size of the retail market, which requires small units. So rather than melting coins into bars a mint that wants to turn a profit in this market does the opposite. This costs money so it would be nice if it was already done.

          If it was not only in coin but in antique coin from the vaults of the Great Satan. the Chinese govt’s profit would be huge.

          The simplest way to retire a chunk of the US debt would be to sell the coins to US citizens, at way above bar price. The domestic market alone would gobble them up

          The only caveat is the same one the US and the Chinese and especially the Indians would face: you don’t want the citizens thinking of gold as a store of value.

      • Nick Kelly
        Feb 18, 2018 at 4:21 am

        This ancient conspiracy theory laid to rest years ago. All German gold back.
        But what if the Germans are in on it?
        And what if the auditors are in on it?

        The ever expanding circle of culprits is how these things survive.
        The faked moon landing scenario needs a cast of thousands who never leak, but for the believer, no problem.

    • Dave B.
      Feb 16, 2018 at 10:47 am

      I would bet Rothschild’s stole All our Gold Reserves years ago and moved out of the country. One fact proven over and over the last few years, US officials are All liars.

      • Frederick
        Feb 17, 2018 at 9:48 am

        Dave I would agree with you

  16. Bobber
    Feb 16, 2018 at 10:21 am

    I think US fiscal spending plans are causing the dollar to drop. The U.S. has shown zero spending restraint. If we run $1T+ deficits every year, it will ensure high inflation and weaker currency. The only check against this is the Fed’s plan to reduce its assets and raise rates. You can’t continue spending at this level if rates rise on schedule. This means the Fed and Treasury will be facing off soon, most likely when there is some market turmoil. One of them will have to back off. Or, perhaps the public will put them both in front of the firing squad because of the problems they’ve created.

    • Kent
      Feb 16, 2018 at 12:36 pm

      US spending plans aren’t the issue. It’s the revenue plans that’s causing the deficits. Any nation that is unable to collect the revenues necessary to pay for its spending is long-term in trouble. And the American people are unwilling to do so. In fact, the American people are quite content to take a tax cut regardless of consequences.

      • raxadian
        Feb 16, 2018 at 1:23 pm

        Is both. Huge debt plus tax cuts will make this a horrible year for the US.

        Some taxes will have to be raised even if the US cuts the budget for everything but the military.

        A stopgap measure would be to force certain companies to pay fines although the money from that wouldn’t even last two months.

        • Frederick
          Feb 16, 2018 at 1:31 pm

          They need to cut the military budget by 30 percent and give SS recipients a realistic increase in benefits

      • Feb 16, 2018 at 7:01 pm

        Revenues will still rise as the Tax Cuts begin to work and velocity of money increases but if we spend more than the revenues rise than we have a problem . Its the spending Stupid we should at least cap the budget and let the revenues from the tax cuts start to reverse the National Debt .

        • d
          Feb 16, 2018 at 7:48 pm

          “Its the spending Stupid we should at least cap the budget and let the revenues from the tax cuts start to reverse the National Debt .”

          Great deflection

          1 NOT the spending.

          2 NOT the deficit.

          3 NOT the Economy.

          4 NOT the FED itself.

          Try the inconstancy and instability in the white house, combined with a new FED Head (Another stupid vindictive anti P 44 white house decision).

          = Oh we dont know. = What we dont know, understand, and cant predict with reasonable accuracy. WE DONT LIKE.

  17. Paulo
    Feb 16, 2018 at 10:25 am

    I always think back to the George W press conference around the time of TARP and the subsequent unfolding crisis.

    ” If money doesn’t loosen up, this sucker could go down”. (It sure loosened up now, didn’t it?)

    It also happened pretty darn fast and it wasn’t that long ago. Can you see any current politicos actually having something to say, or anyone believing them in today’s climate? This goes for my country, too….Canada. Our respective governments and our financial intitutions have little credibility these days. For the last 15 years my wife and I have been quiet and conservative preppers; not the flashy appocolypse types, rather more like old fashioned immigrants that worked in our local mills and woods. (They lived through the ramp up to WW2 and the nightmare of collapse and upheaval.) We bought only what we could afford, saved a percentage of our wages….always, paid down all debts including mortgages; stuff like that. While we are no less concerned about the economy and Govt debt, we also don’t feel like victims of circumstance and under the thumb of people and institutions we don’t really trust very much. I also like to read history. A mix of healthy perspective and cynicism is helpful.

    Can you imagine actually trusting something a Steve Mnuchin might say about the Economy? This is not a political blog so I’ll leave it at that.

    My father-in-law lived through the blitz in London. They had nothing before the war, and nothing after. They lived in a rented Council flat. My mother-in-law’s family were Ukes (Ukranian) refugees homesteading in northern Alberta. My own folks went through the Great Depression, Mom starving in New Brunswick and Dad surviving in northern Minnesota. Guess what saved them and ultimately brough them together in Ghent, Belgium? WW2, of course. That is what I fear. Tumult always leads to scapegoating and war. We are on the cusp of much upheaval and it is never different and never will be. Just MHO, and declining in value 2 cents worth.

    regards Paul S

    • Frederick
      Feb 16, 2018 at 10:36 am

      Wonder if George W was sober at the time He’s not my idea of an economist

    • Anon1970
      Feb 16, 2018 at 2:52 pm

      When I was in high school and college, the C$ was pegged at 92.5 cents US +/- 1 cent. As irresponsible as US politicians have been when it comes to the nation’s finances since the days of LBJ, the US$ has outperformed the C$ (currently worth about 80 US cents) most of the time. But if one is poor, one is probably better off in Canada where the safety net is much better. Canadians don’t go bankrupt because of medical bills, but some Americans do.

  18. QQQBall
    Feb 16, 2018 at 10:40 am

    Are the dates on that chart correct?

    • Feb 16, 2018 at 11:12 am

      Yes. The numbers are years. So Jan 18 = January 2018

  19. GSH
    Feb 16, 2018 at 11:25 am

    Lowering the US corporate tax rate and now a lower dollar is really hurting Europe. Much gnashing of teeth and whining. Expect a retaliatory action from over the pond.

  20. Mr. Knoss
    Feb 16, 2018 at 11:29 am

    Well, so far in February, the number of Treasuries that have “rolled” off of the Federal Reserves balance sheet is ZERO.

    Has QT been put on hold?

    • Feb 16, 2018 at 1:43 pm

      No. On the contrary, it’s accelerating.

      Treasuries only roll off when they mature. They mature at mid-month (Feb 15, $31 billion matured) and at the end of the month (Feb 28, $32 billion will mature). The Feb 15 maturities were not included in yesterday’s weekly balance sheet which cut off on Feb 14. Next week’s balance sheet will show the roll-off from the 15th, and you will see a big chunk roll off. The early March balance sheet will show the Feb 28 roll-offs. I will update on this in early March.

  21. Feb 16, 2018 at 11:40 am

    Interesting reverse logic, the dollar is cover for the Feds rate hikes? I assumed the Fed was raising rates to keep the slide orderly. Dollar policy comes from the WH, its not a monetary aberration. At some point the Treasury may decide to defend the dollar buying at some lower benchmark. Jim Rickards thinks they will peg the dollar to gold and defend gold at a much higher level (5000). So far the markets offshore investors have shrugged off dollar weakness, but the currency derivative market is not transparent. It could have some serious disconnects allowing for a repeat of 2008 should things move too quickly.

  22. mean chicken
    Feb 16, 2018 at 11:44 am

    Well, isn’t the US still subsidizing export of manufacturing jobs in favor of debt?

  23. Peters
    Feb 16, 2018 at 2:38 pm

    A lower dollar is good all around – good for exports, good for the stock market and good for the third world countries mired in US dollar denominated debt. It means those countries will continue to buy our exports, and stocks. Not to mention its firms their commodities base.

    Great news!

    • Feb 16, 2018 at 5:01 pm

      If it’s such great news, let’s take the dollar to zero. That would be the ultimate good news. Stocks would have infinite prices. All dollar-denominated debt in emerging economies would be zeroed out. The US government wouldn’t owe anything anymore either, and the debt problem would be solved once and for all. Same with corporate and consumer debt… it would all just be zero. Did I forget anything? Nah…


      • Gold
        Feb 17, 2018 at 3:23 am

        silly little savers like me

      • TomYumGoong
        Feb 17, 2018 at 8:41 am

        Many believe that what you describe is the long term plan.
        If it is not the plan, however, it appears to me to be the only long term option.
        The scary part of it all, IMHO, is that the whole world gave up hard currencies 50 years ago.
        Bad enough if one currency smokes, but they are almost all crashing compared to any real measure of value, except maybe the Swiss franc?

  24. WES
    Feb 16, 2018 at 2:47 pm

    The dollar index shown in the article’s graph is the Wall Street Journal’s own USD index which is different from the more commonly used USD index.

    In regards to Washington’s ever increasing spending. They have every incentive to keep spending more and more because the USD is the world’s reserve currency. Probably at least half of the USDs in circulation are held outside of the US. So that means at least half if not more of Washington’s deficit spending is paid for by the rest of the world! With a deal like that why would any politician want to balance the books?

    Notice too that the military was given more money than all domestic programs put together! That is no accident. The politicians all know that it is the big military that keeps their sweet deal going!

    No wonder China wants in on this protection racket!

    • Feb 16, 2018 at 5:10 pm

      The “commonly used” DXY Dollar Index only contains six currencies in the basket: euro, yen, UK pound, Canadian dollar, Swedish krona, and the Swiss franc. It doesn’t contain the Chinese yuan, the Mexican peso, or any of the other currencies that are important to US trade.

      The “Trade Weighted Dollar Index” (I have shown it before but few people use it) contains many currencies but the weighing is done based on different criteria that the WSJ index, which is weighted by currency trading volume.

  25. gorbachov
    Feb 16, 2018 at 3:12 pm

    The value placed on the dollar of a country is a bet on the future of

    that country. Right now the future of the U,S is troublesome.

    Consider,people don’t want to travel there-tourisim is way down-,

    They are evicting educated mexicans even as they need more workers.

    They are reducing money supply ,leading to way higher interest

    rates as housing affordability is already difficult.

    Americans are killing each other left right and in schools and

    they won’t consider solutions.Lastly they have a leader the free world

    world cannot stand. Tough times.

  26. JM Keynes
    Feb 16, 2018 at 3:19 pm

    – I personally still expect the USD to rise/to go ballistic (somewhere) in the (near) future.

    • Feb 16, 2018 at 5:13 pm

      I don’t know about the “ballistic” part, but I also expect the dollar to end the year above where it started the year.

      • d
        Feb 16, 2018 at 5:28 pm

        This is a mid term Year and there are, many negative variables.

        I would not BET on those expectations yet.

  27. Scott
    Feb 16, 2018 at 7:52 pm

    Champing, not chomping. From same root as champion. Horses don’t chomp on their bit.

  28. MCH
    Feb 16, 2018 at 8:12 pm

    One of the interest effect of the dollar dropping is that it could invite additional “investments” in physical assets by citizens of other countries… *cough China cough* specifically in real estate. Although that would largely depend on how much more control the PRC put on the outflow of capital from the mainland.

    But the rising interest rate in theory should cause the real estate to drop in the long run, but could cause prices to spike higher in the very near term.

    I wonder how those competing forces will play out. It might be a near term sugar rush followed by a large crash.

  29. Ev Last
    Feb 17, 2018 at 12:31 am

    There is no one interested in buying bonds that will be losing value as interest rates go up. Everyone in the world is leaving the US bond market and won’t be back until rates level out. Rating agencies should be downgrading US debt due to the irresponsible government. Debt as a percentage of GDP is exploding.

    • Frederick
      Feb 17, 2018 at 9:51 am

      I believe Moody’s threatened to do just that not too long ago

  30. Ed
    Feb 17, 2018 at 11:57 am

    What if Powell opened his term with a half point increase?

    • Feb 17, 2018 at 12:06 pm

      That would certainly get the market’s attention. But I doubt it. I think for now they’re playing the “continuity” game. Once the New Fed has settled in and once all the slots are filled (including the Vice Chair), they might step up the pace.

  31. KiwiinCanada
    Feb 18, 2018 at 11:54 am

    I am wondering if the increased short rates in the US compared to a zero bound world (Jpn and Euro) are increasing hedging costs for institutions in Europe and Japan. The low spreads over treasuries in dollar borrowings by offshore entities encourage expanding balance sheets and exchanging US dollars for local currency. In addition those entries with local currency assets and dollar liabilities believe they have a greater balance sheet capacity and that there is no shortage off US dollars.

    A severe global risk off event including widening spreads may negatively impact the above. Safe haven flight to the US dollar, more attractive yields on US Tbonds, currencies falling. Suddenly there is a dollar shortage again.

    I’m betting the US dollar weakness is part of the consensus, propping up financial asset prices everywhere, that the Fed will not be to hard nosed through this tightening cycle. The fiscal expansion puts happy faces on Main Street, even in the midst of this tightening, through the mid terms. After which we may be in flash crash period during which the Feds commitment becomes clearer.

    I believe normalization has to occur and that risk assets will have to adjust to this long term necessity.

    • WES
      Feb 18, 2018 at 5:15 pm

      Hi KiwiinCanada:

      You touched on two important topics; the surplus/shortage of USDs and “normalization”.

      The US regularly cycles the USD from surplus to shortage as part of its financial warfare against the rest of the world. A look at a long term USD chart will reveal this pattern.

      Normalization needs to happen to provide the markets with a true price discovery mechanism. On this I am not so optimistic. The Fed has tasted increased if not total market control since 2008. They will never ever give up those powers. The term “New Normal” has been used to describe what the Fed has done. Basically this has meant that in the Fed’s “New Normal” market US interest rates fell, US stocks rose, and the USD rose. In a normal market it is not possible for all three of these to rise at the same time for an extended period. What we have must seen in February 2018 is the sudden ending of this pattern of all three going up together. What February has brought is rising interest rates, a falling dollar, and probably a falling stock market. Again this change isn’t normal market behavior either! I suspect the Fed’s fingerprints are all over this too! So the big question is since leaving the “Old Normal” in 2008 for the “New Normal” will the “New New Normal” in 2018 be equal to the “Old Normal”? I don’t think anybody knows!

      • KiwiinCanada
        Feb 19, 2018 at 9:44 am

        The new normal has changed the policy instruments available. In the old normal before the QE experiment, the Fed had for the most part short rates to play with. In this tightening cycle they have short rates, QE unwind and risk asset deflation. It is true the third is partially a function of the first two. However this does not deflate its usefulness as an anti inflation measure. Especially in the context of the asset inflation in the easing part of the cycle which was embraced as a stimulative outcome.

        Given the problems inherent in any of these choices, I am not sure that the Fed is going to be to unhappy about slippage in asset prices. I do believe they wish to ensure there is not a repetition of the banking crises, where the big boys find they have no capital.

        Risk asset deflation has the added benefit of not necessarily being laid at the Feds doorstep.

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