Yes, nothing goes straight up or down but the large drop in the dollar (USDX) over night made me say “WOW!” when I check my usual sources this morning. At of this very moment the dollar index sits at 74.53, or a drop of .55 in the last 12 hours.

There wasn’t much “bad” news, per se, that would be driving the drop. The one story that really caught my attention, and is most likely helping the drop, is the latest news that India was looking to buy more gold from the IMF. Obviously, the price of gold has also seen some action in response to the news – hitting another all time high.

Watching the market overnight makes me wonder if the economists expecting a drop of 6.4% vs. the Euro next year is an “optimistic” view.

For the last two months I have been talking about the death of the dollar. My conclusion, along with others who watch the financial world, is government policy has placed the dollar at risk in the global market.  The days of the U.S. Dollar acting as the world reserve currency is coming to an end, which will have negative long term effects on the U.S. economy.

While there is no one single reason that I have come to this conclusion, it is clear that the economic indicators are lining up for such a situation to occur.  The speed of such an event is unpredictable, some people are saying within the next year while others are pointing for the death to take place over the next decade.  In the end there is no single answer, and a number of events dictate if (or when) such a thing would even happen; however, economic analysts are calling for the dollar to depreciate 6.4 percent versus the euro next year unless the U.S. changes economic policy soon.

It is one thing for bloggers and economic watchers to call out trends, it is another when economists who work in the financial market to point out the problem.  Without action by the Fed (raising rates, cutting funds) the dollar is in trouble on the world market.

A number of things to take note of

Alvaro de Molina, GMAC Financial Service head, out

Only 19 months as head of the troubled financial services unit, not a good sign, and he was kicked out by the board no less. I wonder how much this action speaks about the current condition of the company. Michael Carpenter is taking over who, ironically, was a director at the now in bankruptcy CIT Group.

And speaking of CIT – Goldman Sachs goes after the business

One major worry about the CIT bankruptcy was the ability for small business to obtain credit.  While contracting is still taking place, it looks like Goldman Sachs is going after CIT business while the company is in bankruptcy. The story doesn’t explicitly state it, but when you are targeting 10,000 small business customers for credit – and the company that would service such a market is in ruin – not hard to put the pieces together.

Oh, yea, and on the topic of taxes

Yesterday I posted a graphic from mint.com regarding taxes in the US. As I did not go into more detail, I want to point out one thing – 5% of the population pays 60% of the income taxes.

President Obama warns of double dip recession

Just a few short months ago President Obama was standing in front of congress, touting his policies, and taking credit for the “economic recovery”.  Today he is warning that his very same policies could fuel a double dip recession. A number of people have been saying this for months – myself included: Chances for the recession to pick up next year are near 100% once government spending stops.

People needs to come to terms with high jobless numbers, lower paying jobs, and a lower standard of living.  How is that for change?

The Dollar

The USDX is quickly heading back toward 75 today, and gold has hit another high.  The signs as to why this is happening are just all over, people just need to look. Despite the administration saying they have a strong dollar policy there is little evidence to support those claims.

Finally, the post office records huge loss – again

The post office recorded a $3.8 Billion dollar loss and, once again, is thinking of cutting Saturday service. How the USPS is around still amazes me.  Most mail I get is junk, nothing of any value.  FedEx and UPS have put them to shame and can provide better, quicker, services… All the USPS manages to do is drive up cost, cut employees and watch satisfaction ratings drop…

Note to President Obama – as others have pointed out, using the USPS as to a ’successful’ government run program is a poor move, especially when trying to pitch health care.

The dollar index (USDX) closed below the critical support level of 75.00 today – during the trading day, as well as the calendar day. Keep an eye on the chart below for the next several days.  

With little support between 75 and 72, it would be very interesting to see how the market reacts. Especially when government like China come out and say U.S. fiscal policy threatens the global economic recovery, especially since this comment came right after China talked about keeping the yuan strong rather healthy.

Did anyone watch the action of the dollar today?

As I was unavailable most of the day I was unable to see the action until I got home but the dollar once again broke through the 75.00 mark – all the way down to a low of 74.77.  As the trading day was coming to an end the USDX managed to make it back above the 75.00, also known as what traders sometimes call the support level.

A number of people I speak to think 75 is a critical support level as there is very little in the way of support on the way down to the next major support level of 72.  When 72 breaks all bets are off the table.  This action is interesting to note, however, as the dollar manages to get back to support by the end of the day and has consistently done so over the past several weeks.

My question focuses on what happens when the dollar closes below that psychological level? As a betting man I would guess a movement lower from a mid-term perspective. We have to remember that investments rarely just go to zero (delisting of stocks/bonds aside).  What is often seen is a zig zag pattern – one step forward and two back.  While I would expect the USDX to find its way to the area around 72, it will not be a straight drop.

While a number of events are pushing the dollar lower the news of the day that may explain the action is this: China Signals That It May Allow Currency to Rise Against Dollar.

This is yet another signal, along with moving to a basket in place of the U.S. note as the reserve currency and not selling oil in dollars, that points to the U.S. dollar falling.  If China strengthens the yuan the government is providing a clear sign they have concern about the rise in property and equity prices within their country.

They are moving to prevent inflation.

From the U.S. perspective Chinese goods will become more expensive, possibly impacting the U.S. economy, and it also signals to the world that China is no longer interested in the dollar as an investment.  Also, the possible move to strengthen the yuan can be seen as retaliation for President Obama’s protectionist economic decisions that end up negatively impacting China.

Interesting times we all live in.

A number of articles in the last few months have shown how China is buying up commodities left and right, Niall Ferguson tells us why:

Washington D.C. is too complacent about China’s ability to wean itself off the dollar.

The idea they don’t have anywhere else to go or would shoot themselves in the foot if there were a steep decline in the dollar or appreciation of their currency reassures many people in Washington ‘we can relax’,” he says. “An appreciation of the renminbi may reduce value of their international reserves but increases the value of every other asset the Chinese own,” most notably the commodity assets they have been buying all over the world.

Let’s face it; in a barter system a commodity would have more value than a piece of cloth that has nothing backing it.

Several economists have been warning about the death of the dollar for months now; however, the media had not given significant attention to the topic until Robert Fisk published his “The demise of the dollar” article with The Independent.

The main takeaway from the article is that countries (Gulf Arabs, China, Russia, Japan and France) are working to end use of the dollar for buying / selling oil, instead using a basket of currencies for the purchase. Such a move would, essentially, end the dollar as the world’s reserve currency.

While world governments came out with strong denials of such a plan, the gold and silver markets seem to believe there is weight behind this story. Since the story broke gold has moved from $990/oz to $1050/oz; likewise, silver has jumped from $16.50/oz to $17.79/oz.

Now, it seems, the media is finally starting to pay attention.

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”

Dollar facing ‘power-shift’: analysts

“Three conclusions stand out very clearly. Firstly, the shift in economic power away from the G7 economies is continuing. “Secondly, there is a growing acceptance amongst those winners that one consequence of this power shift will be to strengthen their currencies.

“And finally, as long as the US economy is not strong enough for any rise in interest rates to be conceivable for a long time, the dollar’s underlying downtrend will remain in place,” added Juckes.

Think the media is slow to respond on this?  Yeah, you don’t say.  People who’ve raised concerns about the dollar are once again chiming in on the situation.

First up, former George Soros hedge fund partner, Jim Rogers:

“Is it going to happen? Yes,” Rogers says. “I don’t like saying it [and] I’m extremely worried about it but we have to deal with the facts. America is not getting better [and] the dollar is going to be replaced just like pound sterling [was].”

Rogers didn’t offer a timetable, and its likely gold would exceed $2000 per ounce if the dollar were to lose its reserve status

Second up we have, Max Keiser, who believes gold will have a large role in the currency basket that may replace the dollar.

When there are a few people all pointing to something, but the masses are not giving any attention to the subject, it makes sense to give the topic some respect.  Even if the few are wrong, it doesn’t hurt to run scenarios on how such an event could impact you. In this case, I have the opinion that Rogers, Fisk and Keiser are closer to reality that anyone else.