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The Dollar Panic

Posted April 11, 2008

 

“Surprisingly, although this bear market
has been vicious on the Dollar, it’s been very, very orderly and we haven’t
seen a panic, yet.” –
  Jack Crooks, The
  Money Trader

Baltimore – (TFN): The following was taken from this week’s Market Insights with Krista Das featuring
Jack Crooks, editor of The Money Trader. Watch this video.

Krista Das:
Jack, the U.S. Dollar seems to be losing value by the nanosecond. Are we edging
closer to a full-blown panic attack?

Jack Crooks:
Well, it sure looks like it and every time it, the Dollar goes lower and lower,
in effect we are edging lower to that but the reality is a panic spike or a
panic attack in the Dollar does nobody any good and nobody really wants it in
terms of the, the major industrial economies. There’s really about three
scenarios that we see that, that are set up here. Number one, we could see a
continued orderly decline in the Dollar. Surprisingly, although this bear market
has been vicious on the Dollar, it’s been very, very orderly and we haven’t
seen a panic, yet. Secondly, we could see a situation where maybe the Dollar is
actually putting in a bottom in here and actually balancing and that sounds a
little bit surprising but there are some reasons that it could be and of course,
the third scenario is a panic spike lower, on the belief that the U.S.
policymakers don’t care about the Dollar and hopefully, that’s the one we
don’t see.

Krista Das: Now, the Dollar is still the world reserve
currency. How is the policy of never-ending credit expansion going to impact
inflation and the global economy as a whole?

Jack
Crooks: It really is a great question. It’s a key question in
the currency markets right now, and there’s really two schools of thought on
that. Is this never-ending credit expansion going to create this massive global
inflation that’s underlying potential for global inflation which we’re
starting to see as people run into the commodities market. In fact, if your
viewers would look at a commodities chart compared to the U.S. Dollar, they can
see a direct negative correlation; that commodities have been going up, the
Dollar has been going down, so in effect, that’s very, very bad for the
Dollar. We’re seeing a little fear against the Dollar. People are moving into
commodities because of that fear and it’s kind of self-reinforcing. 
As they move more into commodities and away from the Dollar, it tends to
push commodity prices up and kind of makes those inflationary expectations
self-fulfilling. The second school of thought is – and I think this is where
the Fed is – is the idea that the credit crunch is really going to slow the
global economy. They look at inflation as a lagging indicator. The jobs market
is getting soft, capital investments slowing down, major institutions just
trying to survive taking money off the table. They think that’s going to slow
this price increase and that’s what they’re hoping for and their idea of
never-ending credit expansion is something that they’re forced to do here.

Krista DasRather watch the financial video? Click here.

Krista Das:
What do you think of some of the Fed’s recent
actions to revive the economy?

Jack Crooks: Well,
as I said, I think their hands are tied. I think they’re forced to do it here.
From a free market standpoint, I hate it. I would like to see this stuff wash
out of the system, this major investment kind of from an Austrian school type of
approach. But unfortunately, ‘cause the credit system now is so interlinked
and so huge, these derivatives that we have all over the world in effect, four
hundred trillion in derivatives. The Fed has to take this step because of the
fact that if they let these things go away, let these institutions like a Bear
Sterns go away — Bear, for example had ten trillion in counter-party
derivatives on its balance sheet alone – if they let these things fade away,
it, it’s interlinked in a daisy-chains throughout the global economies so,
opening up the discount window, in effect, to investment banks for the first
time since the Great Depression, really was a move that we know was necessary
for the Fed and I think it was fairly creative.

Krista Das:
Let’s talk oil for a moment. With the Dollar
being in such a fragile state and in crude oil being priced in Dollars, what are
the consequences that we should expect?

Jack Crooks:
Crude oil and the Dollar is a huge relationship. For one, crude is priced in
Dollars because the Dollar is still the world major currency. And again, if you
look at crude oil versus the Dollar, as crude oil has gone up, the Dollar has
gone straight down. So the implication is if crude oil continues to go higher,
it’s very, very negative for the Dollar. Couple reasons why:oil producers that receive all this, all these Dollar reserves as oil
prices go up want to get rid of those Dollars as fast as they can. They
basically have too many Dollars, especially when the Dollar’s weakening. So
that reinforces the downtrend of the Dollar as these oil producers move money
from the Dollar into Euro or into British Pound or in the Japanese Yen. Second
problem is a sentiment problem. As the Dollar weakens and oil prices go higher
and higher, there’s the belief in the background that there could be a whole
structural shift in the Dollar/oil market, meaning oil producers may wake up one
day and say, “Hey, we’re no longer gonna take Dollars. We want Euro or
Pounds or something,” and that would be extremely, extremely negative for the
Dollar. And again, it comes back to what I’ve said earlier in your, in the
question before; the Fed is hoping they see some type of slowdown and a break in
these commodities which would tend to support the Dollar, which is the world
reserve currency, which does nobody good when you’re, when the world’s money
is fading away. So that’s a close relationship that they really need to watch
and I don’t think the Dollar could rebound unless we see some type of pullback
or break in oil prices.

Krista Das: Going
along the same lines of oil, what about China? There’s no doubt that
China’s growth is strong but the Yuan is pegged to the U.S. Dollar. What do
you see happening to China’s economy if the U.S. Dollar continues to seriously
decline?

Jack Crooks: Well, we’re
already seeing the effect of – the effects of that and the effects are that
China’s importing a massive amount of inflation because it’s currency is
tied to the U.S. Dollar. As the Chinese currency weakens along with the U.S.
Dollar, it forces up the price of real goods or commodities to China and China
right now is in a very, very nasty inflationary spiral and it could get much,
much worse, if the Dollar continues to fall. The implications are that China is
gonna be forced to let their currency rise a lot faster and go a lot higher than
they wanted to because of this inflation problem. So again, that’s something
very closely to watch. The inflation interrelationship here and the commodity
prices are very closely tied to what happens to the Dollar and, of course,
China.

___________________________________________________________________________________________________________

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