In this article, I’ll give you all the dirt on the Greenback and why it might be a good idea to start dumping it. If you don’t believe me, just take a quick look at the US dollar index, which made a staggering decline from a high of 89.22 in June to the brink of falling towards the 80.00 handle. What’s up with that big “L” on the Greenback’s forehead?
1. Risk Appetite
Lately, it seems that investors just can’t get enough of higher-yielding assets as risk appetite continues to improve. Blame it on upbeat economic figures from most of the major economies or the fact that debt contagion fears have already started to fade.
Because of this, improved investor confidence prompted them to move their money away from the safe-havens to riskier assets. Equities are gaining, as evidenced by the S&P500 which is up by around 1% since June. And do you know who stands to lose from all this? Why, the safe-haven low-yielding US dollar, of course!
2. Deflation Concerns
Since the start of the year, inflation has been subdued in the US. The most recent CPI, which is considered as one of the best measure of inflation, marked its third consecutive decline when it reported that prices fell 0.1% in June. The PPI that measures the price at which manufacturers sell their goodies showed a decline of 0.5%, which also marked the third consecutive month of falling prices.
While falling prices might seem like a good thing, it actually isn’t. If people believe prices will continue to keep on falling, then nobody will spend. Weaker prices lead to lower revenues and profits, which gives companies less incentive to reinvest, increase wages, and hire people. Hot shots in the economic world call this vicious cycle of low demand and production a deflationary spiral. Deflation is a very nasty thing, as it puts a serious drag on economic growth.
3. Bad GDP
Speaking of economic growth, it looks like months’ worth of poor economic data in the US has finally led to a disappointing advance GDP estimate for the second quarter. According to the report, the economy grew at 2.4%, which was below expectations and slower than the previous quarter. This seems to indicate that the stellar growth seen during the third and fourth quarter of 2009 has now leveled off.
4. Low Interest Rates
In recent announcements, Bernanke and his boys at the Fed practically shot down all hopes of near-term rate hikes. Throwing one dovish comment after another, they expressed their desire to keep interest rates low for an “extended period.” Is this the Fed’s way of saying inflation will probably stay low in the months to come?
In any case, it probably wouldn’t be wise to hold your breath for a rate hike. Given the cloudy economic outlook for the US, the last thing the Fed would want to do is choke off economic activity even more by making lending more expensive.
5. Quantitative Easing Part 2?
I don’t know about you, but I think all these arguments make it likely for the Fed to bite the bullet and turn to quantitative easing. They’ve been down that road before, and it’s starting to look like they might have to track that path again. In fact, a top US Federal Reserve official that goes by the name of James Bullard said last Thursday that the Fed should continue to buy up US treasury bonds so that the country wouldn’t fall into deflation!
Quantitative easing is economist jargon for when a central bank buys its government securities and debt to increase money supply. They do this in hopes of increasing economic activity, just as the Fed did in early 2009. What ensued was a dollar sell-off that sent the currency plummeting. The question is, “Will history repeat itself?”