US Dollar Analysis

US Dollar Will Depreciate Over the Long Run.

It is our belief that US dollar will depreciate over the long run. 

To have a strong currency, a country needs to solid economic fundamentals:

1. Little to no debt

2. A trade surplus

3. A stable balance of payments (the difference between a nation's receipts of foreign currency and its expenditures of foreign currency)

4. Growing international reserves.

Currently, according "The Downward Spiral" written by Jim Rogers in February, 2003, the US national debt to foreigners was around $6.4 trillion, with interest payments alone last year totaling $333 billion. The US imports far more goods than they are exporting. International reserves remained around $60 billion, but the United States attracting far less direct foreign investment every year. US current account deficit runs at roughly $500 billion a year, or five percent of gross domestic product.  He also commented, "it costs us about $1.3 billion a day in the foreign markets just to keep the dollar afloat. Our $60 billion of reserves against our obligations would last 3 minutes if creditors begin cashing in. We’re like the untrustworthy brother-in-law who keeps borrowing money, promising to pay it back, but can never seem to get out of debt. Eventually, people cut that guy off."

Indeed, the US national debt places a tremendous pressure on the US currency.  Sooner or later, just like the British Pound in the 19th century, the US dollar would lose its long term value thus losing its status as "international reserve currency".

Please read an news particle posted below by the Financial Times on October 20, 2004.  Note that traders did not react on the news, and the US dollar continues to depreciate.  This is a signal of shorting US dollar.  We played this news by buying Australian dollar futures December 2004 contract on October 21, 2004.

US Treasury chief seeks stronger dollar
By Jennifer Hughes in New York and Steve Johnson in London
Published: October 20 2004 19:55 | Last updated: October 20 2004 20:09 (Financial Times)

John Snow, the US Treasury secretary, on Tuesday reaffirmed the Bush administration's support for a strong dollar as the US currency slid to an eight-month low.

A week-long sell-off has seen the dollar slide to its lowest levels since February against the euro and Swiss franc, leading traders to suggest the currency's decline was gaining momentum.

Asked to comment on the currency while touring a school in Tampa, Mr Snow said: “You know our view on the dollar, we've articulated it many times. We support a strong dollar.”

Mr Snow's comments were the first official remarks about the dollar's value in recent weeks, despite an unusual series of comments from Federal Reserve officials about the dollar.

Usually, Fed members steer clear of currency policy, which is decided by the Treasury. Last week Robert McTeer, president of the Dallas Federal Reserve, said: “Over time there is only one way for the dollar to go lower”.

On Wednesday the euro rose above $1.26 for the first time since February this year when it hit a peak of $1.2930. Since January 2002, the US currency has lost 29 per cent of its value against the euro. Strategists said Mr Snow's remarks would do little to support the dollar should traders and investors believe it was back on a weakening trend.

“The market has got its eye on the February peaks again,” said Marc Chandler of Terra Capital Partners, a consultancy.

Politics has also weighed on the dollar, with investors reluctant to commit fresh funds to the US ahead of the presidential vote next month.

“There's uncertainty about the effect of new voter registration, there's uncertainty about trade policy and about a possible new Treasury secretary,” said Mr Chandler. “It seems that most new Treasury secretaries make several gaffes when they start and this could hit the dollar.”

Wednesday's $1.76 jump in Nymex West Texas Intermediate oil prices to $55.05 a barrel has also heightened concerns that growth in the US has peaked, with some commentators seeing gross domestic product growth of just 2.5 per cent in 2005. On Wednesday the dollar also slid to a three-month low against the yen at Y108.13 amid suggestions that the Bank of Japan could be preparing to intervene to stem the pace of any new dollar decline.

Traders were dismissive of the reports, but did not rule out the possibility of further intervention by Asian central banks should the dollar continue to slide.