Grotesque Money Printing Thanks to the Fed, the Dollar Is Going Down

Many American economists say the greenback is falling because the global economy is recovering – so investors no longer need the dollar as a "safe haven".

That’s nonsense. The reality is that "safe haven" status has shifted away from the dollar and towards tangible assets that the US government can’t debauch by printing more of them.

That’s why gold just hit a fresh all-time high of well over $1,000 per ounce. That’s why commodity-backed currencies like the Australian dollar are now soaring – causing howls of protest from Aussie exporters. Meanwhile, global investors are quitting the US currency because they’re worried it’s a sinking ship.

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It’s hard to disagree. America is still running a current account deficit equal to almost 3pc of national income. In a single month over the summer, the gap between America’s imports and exports widened no less than 16pc.

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America’s external imbalance remains sizeable in part because the country is the world’s biggest oil importer. When crude prices rise, Uncle Sam’s trade deficit increases, which, in turn, pushes down on the dollar.

As every financial analyst knows, a falling dollar means rising oil as the black stuff is priced in US currency. But the relationship also operates in reverse. When oil strengthens, the dollar tends to weaken as America’s trade deficit suffers. Crude is now more than 50pc above its mid-February low – ergo, a weaker dollar.

The dollar is also falling because that’s what the White House wants. "It’s important America continues to have a strong currency," said US Treasury Secretary Timothy Geithner last week. "We’ve made clear our commitment to a strong dollar," added Larry Summers, the Head of President Obama’s National Economic Council.

These men insult our intelligence. The US government desperately wants a weaker dollar – so boosting exports while lowering the value of America’s massive foreign debt. The currency markets will keep betting against the greenback as they know the Federal Reserve will do nothing to stop a weaker dollar coming true. "Benign currency neglect" is the cornerstone of Obama’s recovery strategy.

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October 12, 2009