US dollar update

To the surprise of many, precious metals and commodity prices have continued to weaken since 2011 as the US dollar has been attracting international inflows. As marked in the chart update below, the $83.50 area on the US dollar index (against a basket of world currencies) is the level to watch for a confirmation of this bullish trend for the greenback; and the likely continuation of pain for commodities and commodity-focused economies like Canada, Australia, Brazil and Russia.

There are a couple of factors that may well continue this move over coming months: contracting world demand suggests further weakness for commodity prices, at the same time that the US dollar receives relative “safe haven” inflows from international capital looking for the most liquid places to park. In addition, in a world of near-zero deposit rates most places, currency appreciation offers the prospects for capital gains in the US dollar as it rallies from a 40% decade-long-decline between 2001 and 2011. With US stocks now priced for flat returns and ungodly volatility from present levels–literally return free risk– it is not necessary to hold dynamite for exposure to attractive return potential as the global economy slows down. But one does have to think outside of the group-think box.

Chart source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

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12 Responses to US dollar update

  1. William says:

    This is garbage !!! A rising USD DOES NOT automatically mean that the US enjoys an inflow of money. It simply means that demand for USD is larger than the demand for e.g. EUR.
    More over, demand for EUR could drop 10% and demand for USD could drop 9% at any given time. The result is a rising USD/EUR.
    Pull up a chart of the US trade deficit since say 1980 and you’ll see in 1990 the trade deficit was zero. After 1990 and up to 2008 the US trade deficit increased EVERY year. And even after 2008 the US continued to have a Trade Deficit. And having a trade deficit equals a net outflow of money.

  2. Barry says:

    Much to the chagrin of my goldbug swimming partners I believe the US dollar will once again be a safe haven as this cyclical bull winds down and leveraged reality sets in. I bought a large amount of US dollars at the wholesale rate a couple of months back – one can do this by buying a CDN security in Toronto with dual listing (CIBC for example) in NY, then selling it immediately on the DOW with the proceeds journaled into your US trading account. Best on a day when prices are going up so you can even profit a little from it … if lucky.

    “But I digress.”

    Any suggestions as to where I can park the cash in the US Danielle? … with thanks.

    Enjoyed your presentation(s) at the Vancouver Resource Show last month by the way. Your were one of the highlights at this otherwise amusing carnival.

  3. aliencaffeine says:

    As usual, the gold-haters hiss loudly when gold drops a lot. But then where were you in 2001 when it was 267? Nary a word.

    I think the USD is strengthening and gold weakening solely on the fact that the US is going to be a huge beneficary of the FRACKING BOOM, reaping enormous amounts of money from those federal lands that Obama is going to get to lease. Yep, I said it. Thats just what I see and thats how I place my bets. There may be needed corrections along the way, but if you are waiting for stocks to return to 2008 levels. well you just may be stupid and a little off-base.

  4. Roberta says:

    There are a lot of people waiting for the next BIG leg down that many talking heads have been predicting for the past 4 years. We are still waiting. I’m looking forward to being able to back up the truck. But I doubt it is going to happen because the government is probably secretly laundering money to buy stocks to prop up prices and if they aren’t doing that we KNOW they will print to infinity to keep it propped up if necessary.

  5. robert j heartland says:

    I sure hope this trend continues until I get my 10,000 tax return! I’ll immediately go to a business I know and buy all the silver I can with it! I was going to pay down a few credit cards,but with the market ready to blow again and silver ready to soar I would be crazy not to scoop up a low buy on silver just to turn around and pay off all my debts when it explodes upwards! I’ll even have money left over! Think I’m crazy? Just look at the horrible earnings or lack of earnings from Walmart this past week! It is just going to get worse from hear on out to the first quarter earnings and Wall St is going to react this time for real! If people are stupid enough to sell Gold and Silver at reduced prices like this then I’m buying big time!

  6. michael says:

    I think Charlton sums is all up pretty well in this short clip…

  7. William says:

    Or take a look at the timeframe from 1995 up to 2001. The USD rose but the Trade Deficit (=outflow of money) rose at the same time, as well.

  8. You might wish to re-visit Adam Smith’s garbage.

  9. William says:

    I don’t need to read Adam Smith’s “garbage”. There’re economists out in the real world of today that DO understand the weird implications of having the world’s reserve currency. James Grant does understand some of the implications. But it’s better you turn to a Balance of Payment expert like Mr. Michael Hudson. (

    Even folks like A. Gary Shilling (“The age of deleveraging”) & John Mauldin make Mr. Venable’s mistake. That’s where Robert Prechter (“Conquer the crash”), Harry S. Dent Jr., Hugh Hendry & Mike Shedlock have a better grasp on reality.

    A falling e.g. EUR/USD could mean that demand for both currencies (=cash) is rising, but the rising demand for Euros then is relatively smaller than the rising demand for USD. Hence a falling Eur/USD.
    More over, those USD could be deposited in European, Canadian, Japanese or Brazilian banks. That explains the gap between the chronic US Current Account Deficits (occurring every year since the late 1950s) and a rising USD(X).
    When I compare two financial metrics (Budget Deficit Vs. Current Account Deficit) of the US in 2007 vs. the situation of today then the dynamic of those metrics have worsened dramatically. In spite of a rising USD. And “Energy Independence” will worsen that dynamic even more.

  10. Chris says:

    Why do people have money? In order to buy real goods, which allow them to live, and to support themselves in the most advantageous lifestyle in history.

    Compare the amount of real goods with the amount of financial instruments that are out there: stocks, bonds, loans, derivatives, and so on. The amount of paper per real unit of goods is enormous in the current economy.

    Eventually, people will want to trade in their paper for goods. This is already starting to happen: for example in Japan, where an aging population needs to live off their savings.

    When this comes into full force, there are only three things that can happen:
    1. Production increases (natural resources, technology, etc.) fill the gap.
    2. Deflation happens as credit contracts, and bonds are defaulted on. I. e. money is destroyed, so the price of goods starts to sink.
    3. Inflation happens as people realize that there’s far, far too much money in the economy. Money is over-created, so the price of goods rises dramatically.

    We may get all three. But don’t bet against inflation as the final outcome.

  11. William says:

    The US has been running chronic Current Account Deficits in the last say 50 years. And that makes it extremely likely that the US will be the first one to impose capital controls. Then you can’t get your money out of the US. And that will turn even T-bonds into dynamite.

  12. William says:

    For those who like “outside the box” thoughts:
    1. I forsee that when (not IF) US interest rates are going to rise, it will be accompanied with a rising USD !!!
    2. A falling Trade Deficit, falling commodity prices and falling US demand are good for the US consumer but they will hasten the arrival of higher US interest rates.

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