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Status of the US Dollar Index until September 23, 2017

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Status of the US Dollar Index

The US Dollar Index measures the valuation of US dollar against a basket of other currencies. In TC2000, the index is called DXY0. When the DXY0 goes up, other currencies tend to go down and vice versa.

After that, it trended sideway until Q3, 2014 before rallying in 2014 and mid-2016. The recent rallies were mainly the result of the Fed tapering and anticipation of rate hikes.

      Figure 17.24   (Charts courtesy of TC2000.com)

DXY0 has meanwhile taken a declining direction. Ultimately and close to the bottom of Dow Jones around 21 October 2021, it would most likely break through the horizontal support line of 2008 downwards.

Servicing the debt of the US governments (Federal, State, and Local) requires an environment of low interest rate or otherwise, the risk of governments’ and central bankers’ bankruptcy increases dramatically.

DXY0 trends in the opposite direction of commodities. When DXY0 goes up, the commodities tend to go down and vice versa.

Fluctuation of Dollar index has relatively high impacts on the US economy and labor market. A high value of index means that the price of imported goods and services falls, which results in importing deflation for the US.

Higher index value impacts the US trade balance drastically because, not only the price of imported products and services decline but at the same time, the price of exporting goods and services becomes dearer for other countries.

Consequently, a higher valuation of dollar may lead to relocation of companies and industries. In the long run, this may adversely affect the US unemployment rate.

The lower reading of DXY0 provokes the opposite effects.

Since many years now, a hot currency war is in progress among various countries. This war is made with the ammunition of monetary easing policies, for example, low-interest rates, low banking capital requirements, and QE programs. This war feeds a vicious circle and forces other countries to devalue their currencies in turn, and indefinitely until the trust in fiat currencies vanishes. This happens when the bank notes become worth the intrinsic value of printed-paper.

Therefore, it is clear that appreciation of dollar leads to relocation of companies. The US economy being sluggish, a high value of DXY0 adversely affects the growth rate of the US GDP too. Consequently, a hike in interest rate would be undesirable for the US economy.

Does the Fed know the effect and consequences of a rate hike? Yes, for sure but under the prevailing pressure of free market forces and high level of US debt, meanwhile they are forced to. Otherwise, by refusing to hike rates, they convey a signal that the economy is sluggish, which in turn may adversely affect the valuation of financial markets. The US may then fail to attract the level of debt needed to support its budget deficit.

The US dollar is way overvalued. This is because (1) the US controls the world global finances (the world bank, IMF, the SWIFT system, and the US dollar), (2) the US dollar is the world main reserve currency, (3) undoing of dollar backing by gold, and finally, (4) the Petrodollar. Any change in those areas would most likely lead to weaker dollar. As a simple example, a weakening of petrodollar policy could lead to dumping of reserved dollars by other countries because they would no longer be needed to purchase the Saudi crude oil or other commodities.

For above reasons, the US dollar would suffer most during the anticipated Dow Jones crash.

By the way and precisely to propel their exporting sectors, the ECB and BoJ are fighting with full power to depreciate their currencies against the US dollar and other currencies as well.

Governments need high inflation to contain the burden of their debt over time. However, the numerous world Quantitative Easing programs since 2009 have so far failed to achieve the central bankers’ even mild target of two percent inflation. And the currency war is still going on. 

Currently, one way the governments can import a massive inflation would consist of resetting the world monetary system through a worldwide agreement like the one of Bretton woods in 1944. The IMF and richest central bankers could decide to back their currencies by gold and fixing its price to some $10,000 per ounce over a week end. Central bankers would then be buyer of gold at $9,950 and seller, for $10,050. This would then result in an immediate inflation of some 770 percent (this assumes the current price of gold of approximately $1,300). The price of gold at $10,000 is not an empiric assumption. Currently the amount of world currency notes in circulation is around $26 trillion and the volume of gold approximately one billion ounce. By assuming a 40 percent backing by gold, the price of an ounce of gold would become (26,000 billion x 40%) / 1 billion ounce of gold) = 10,400 (raw figures are approximations).

This decision would result in transferring the buying power of currencies notes to the central banks. This decision would then make the central bankers with highest amount of gold as the richest in the world.

From chapter 13 of the book, we know that in January 1934, the Federal Reserve decided to increase the price of gold from some $20 to $35 overnight, hence creating an inflation of over 60% immediately.

 

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