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Good Day Currency Traders!

The dollar has been on an ugly path for seven years now. And you know what? The guys in Washington are okay with that. It has allowed them to spread dollars all over the globe.

Effectively, they've been juicing global asset markets. Because the dollar is (or should I say "still is?") the world's reserve currency, it is the legal tender of global trade and international payments. The more dollars sloshing around the globe; the more the wheels get greased.

But, there is ALWAYS a limit to the policy of never-ending credit expansion.

And history has told us that when this limit is reached, it always ends badly. I think this view is beginning to take hold in the minds of investors.

This may not be an outright dollar panic, but one thing was clear...


Rising Inflation is Sparking a Mass Exodus Out of
Dollars and into Hard Assets

You've got to marvel at the power of money pumped out by central banks and governments; both in its ability to stoke the flames of investment and prices.

Milton Friedman, one of my economic heroes, nailed it when he said, "Inflation is always and everywhere a monetary phenomenon."

With the fed funds rate making a beeline toward the basement, and the Federal government tripping over itself to get "our" money back to us, cash is pouring into the system.

These money pumpers know full well that leaving the spigots wide open leads to inflation. They just act surprised when prices actually do float higher. But it's the implicit tradeoff that they hope will save the U.S. economy: Sacrificing inflation at the altar of growth.

Last week we saw that on display during Fed Chairman Ben Bernanke's two-day testimony on Capitol Hill. He reiterated the Federal Reserve's focus on economic weakness even though a nasty report showed wholesale prices in the U.S. rose at the fastest year-over-year pace since 1981.

The whole thing has left investors with a nasty taste in their mouths. They know that wholesale price increases will soon seep into consumer prices. And that's no fun!

And yet expectations are calling for FURTHER interest rate cuts!

Look, purposely debasing the currency at a time like this is akin to juggling champagne flutes on a rollercoaster. There's a high risk of damage, especially when there are two structural concerns looming:

Structural Concern #1:
Dollars for Oil

Crude oil is priced in dollars. So as the cost for black gold rises, more and more dollars are sent to the world's oil producers. At this point, the largest suppliers are swimming in pools of green cash.

And even though they keep filling up the pool, the value of their cash is being sucked down the drain. The consequence: Oil-rich nations will start to unload their dollars.

And no matter what they trade into - euros, gold, or even granny smith apples - you can bet the dollar's slide will intensify.


Structural Concern #2:
China Importing U.S. Inflation

China plays an awfully large role in U.S. trade. Large enough that it's important to monitor the changing dynamics between the two countries.

Right now, China's currency is creeping higher against the dollar, as it is still pegged to a basket of currencies that includes the buck. That means China can buy less with its yuan.

And the timing couldn't be worse: China is dealing with inflation of its own, especially in food prices. Every time the dollar falls, China's food and energy costs go even higher.

So it's in China's best interest to let its currency rise at a faster rate. That would send inflation back where it came from - the U.S.

All of this could pressure the dollar even more!

The promise that money will continue to be pumped into the system has refreshed confidence in global growth and appears to have sparked new demand for hard assets. Result: Commodity prices are moving higher while the dollar is moving lower.

The fear of irrepressible inflation is driving everything! The following chart tells the story quite clearly:



Hey, freeing up money for the American consumer and rescuing the credit market may seem like the right course of action to the Fed.

But they better stop ignoring the dollar's status as the world's reserve currency. If they continue down the path they're on, there could be severe implications that are hard to undo.

Bottom line: Inflation has crept back up on us, and the money pumpers are facing crunch time!

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Making 'Cents' of the Headlines
Why Things Just Keep Getting Better Down Under

From Currency Director: Sean Hyman

What Happened:

The Aussie dollar has been on fire lately, and it's all because of Australia's dynamite fundamentals. For instance, let's take a look at the data that came out on Sunday night (and early Monday morning).

The Aussie Manufacturing PMI numbers were a 51.4. Any number above 50 shows that the manufacturing sector is expanding and not contracting. So that part of the Aussie economy is still growing good.

Then there was the TDMI Inflation Gauge. This measures inflation at the consumer level. This number was the exact same as last month (0.3). That means inflation is holding steady (which is actually good for currencies). So that's another bullish sign for the Aussie dollar.

More good news: Australia's Company Gross Operating Profits q/q numbers just came out - and they were 1.9% HIGHER than expected. The Company Gross Operating Profits measures the total amount of pre-tax profits earned by businesses with greater than 20 employees. And this high number means that corporate profits are growing strongly which is good for both stocks and the Aussie dollar.

The Index of Commodity Prices y/y came out also. It came in at 8.6% vs. 6.1% previously. This measures the rate of inflation for commodities such as wheat, wool, rice, sugar, aluminum, copper, and gold. A rising trend has a positive effect on the nation's currency. Commodities account for more than half the nation's export earnings, and exports make up roughly 20% of total domestic income, so inflation of commodity prices is a positive sign for the nation's exporters and the Trade Balance.

So the strong commodity prices have been great for this commodity exporting country. That has also caused the Aussie dollar to remain strong.

What I Say:

I suspect the Aussie dollar will remain strong in the next couple months. Sure, this currency could face a few pullbacks here and there, but think of it like a stock. If a company continues to report earnings that are growing and beating the analyst's estimates, then there's no need to bailout the stock. You'd want to hold onto them and maybe even buy more.

By the way, gold just hit another all-time high through the night on Sunday. It hit US$988 an ounce. Australia is the world's 2nd biggest gold miner, it helps the Aussie dollar as the price of gold rises. Oh, and the number one miner of gold which is South Africa is having tons of power problems right now. So that's just one more thing that works in Australia's favor. There's no "power outages" in Australia to disrupt their mining capacity.

When you see what Australia has going for it and what the U.S. has going against it...it's no wonder traders are buying up the AUD/USD pair. This means a person is a buyer of the Aussie dollar and a "seller" of the U.S. dollar. While Aussie strength is pushing it higher, so is the weakness in the U.S. dollar. So take your pick...both attributes are pushing this pair higher.