Gold Takes Center-Stage In Dollar Scare
By Michael J. Kosares – USAGold.com
Not strong, not weak but strategically benign…
Trump-Mnuchin qualifiers in dollar statements tell all
“While it’s [a strong dollar] described as a desirable and intended thing, it might not be a choice. The size of dollar holdings of reserves (in dollar-denominated debt) and the dollar’s role as the dominant world currency are anachronisms and large relative to what one would want to hold to be balanced, so rebalancings should be expected over time, especially when U.S. dollar bonds look unattractive and trade tensions with dollar creditors intensify.” – Ray Dalio, Bridgewater Securities
Much is made of the direct inverse correlation between gold and the dollar, but acknowledging that relationship does not really get us anywhere. The bigger question is whether or not the dollar will continue to track lower as it has over the past 18 months or will it suddenly reverse course and head higher.
In the end, the international FOREX markets will determine the dollar’s value against other currencies. That journey, though, will be influenced by other players on the stage, i.e., central banks and governments, including the U.S. government and the Federal Reserve, whose main interest will be the value of their currency, especially against the currencies of their largest trading partners.
It is there, on the ultimate battleground of the political economy, that the plots and subplots can become as twisted and complicated as the intricacies of a John LeCarre novel. Note, for example, the couching of terms in the following two statements delivered during the Davos conference late last month:
“I absolutely support a strong dollar over the long term.” – Stephen Mnuchin, U.S. Secretary of the Treasury
“The dollar is going to get stronger and stronger and ultimately I want to see a strong dollar.” – Donald Trump, President of the United States
Those qualifiers, over the long term and ultimately, tell all and go to the heart of what the administration intends. What happens to the value of the dollar between now and ultimately? What happens before the long-term policy kicks in? In its unambiguous ambiguity the Trump administration has signaled no intention of disrupting any market generated dollar weakness. It will stand aside. Beyond that, time will tell to what degree it will project the economic power of the United States if it becomes necessary to keep the exchange rate down.
For the markets, there was no ambiguity in the statements at all. The intent of the administration was crystal clear. Its dollar policy would be neither “strong” nor “weak.” Instead it would be strategically benign. In the immediate aftermath of the Davos statements, the dollar cratered, gold jumped and the bond market went into a tail spin. For traders and speculators, the way was clear. As Marc Chandler of Brown Brothers Harriman told Financial Times: “While Mnuchin was only stating the obvious, Treasury secretaries since Robert Rubin have never really deviated from the strong dollar mantra. The mantra has never really meant much, but to deviate from it suggests that U.S. policy makers desire a weaker dollar.”
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