Out of the dollar and into gold and oil, seems to be the response of the markets to Ben Bernanke’ slash and burn policy. There are even rumours that Saudi Arabia, unhappy with the weakening dollar, will unpeg its currency from the greenback. If this happens, it is truly “look at below” for the US dollar—which may buy you 87 cents of the local unit by the end of the day.
This raises one last point to think about this weekend. How does the European central bank support the dollar without cutting interest rates?
You might wonder why the ECB would want to support the dollar. The answer is that the strong euro could kill Europe’s economic growth—and with two-thirds of the world’s major economies on the edge of recession, this is worth considering.
It’s hard to imagine the European economy will do a rip-roaring trade with China and the US if the Euro goes to US$1.50 against the dollar. With China’s dollar peg…further euro strength hurts European trade in all directions. The dollar’s fall is Europe’s biggest problem.
Leaving aside the absurdity that everyone wants to have a weaker currency (competitive devaluations), one thing to watch for is an aggressive central bank campaign to sell gold in the coming weeks. What’s that you say? We’ve been eating too much mercury here at the Old Hat Factory in Elwood? Perhaps…
It MIGHT sound stupid, supporting the US dollar by selling gold. But the ECB is reluctant to cut rates and fuel inflation, although it floated that very idea this morning in the papers, and if the ECB does cut, gold could soon hit US$1000. If it chooses not to cut rates, however, the ECB could tack in another direction to prevent a further a growth killing slide in the dollar/appreciation in the euro: arrest the dollar price of gold.
A faltering gold price might take the edge off some of the current anti-dollar sentiment. It’s a bit of a contradiction because you’d think the dollar’s decline would accelerate the diversification of currency reserves, which is bullish for the euro, gold, and high-yielding commodity currencies like Australia’s.
But—while they’re busy selling US bonds—the world’s monetary mafia may want to create the impression that the US dollar has not already become a third world currency: and they can achieve that impression by selling gold. There are certain to be many buyers of gold today. But concerted and coordinated central bank selling is a definite trick in the bag of the money mafia. Let’s see if the play it.
Markets and Money