One of my long held fears over the next few years is that we get into a situation of competitive devaluations of our currencies as countries try to either reduce the value of their debt or stimulate exports. The race is firmly on.
Early leader 'GB Pound' shot off into the distance initially with a substantial devaluation, but now the real deal (US$) is coming up on the outside.
To me the dollar is the main event for the next few years as the US seems hell bent on undoing a hundred years of effort to build up value in the hope of keeping the party going a little longer. The key for all currencies are the deficits - namely the trade, current account and fiscal (government) deficits. When a country runs deficits in any (or all 3) of these, they are effectively losing wealth in the long-term. The US (& UK) are experts in maxing out the credit card and the events of the last 2 years have just made things worse. Despite all the pain of the recession, big deficits are still there - which suggests the worst of the pain is still in front of us...
The chart above (from the ever-great timingcharts.com) is of the dollar index for the last 3 years. It shows the last wave down along with the recovery. In the last week, it has broken through technical support and now has the potential to suffer another substantial drop. It's early days but the pieces are in place for a big dollar fall.
It's amazing how ignorant the media is of this. In the UK, they're talking about the '£' showing strength. But the GBP is not strengthening against other currencies, just the dollar. Without doubt this is a dollar event, but since the dollar is the global reserve currency it will affect everyone.
What are the side effects of the dollar dropping? Biased as I am, I go for commodities - namely REAL things. Oil is the obvious one. It has quietly gone from $40 to $65 in a couple of months. Where does it go from here? If the dollar keeps tanking it will go higher. The same goes for my old friends the monetary metals (in particular gold and silver). Gold is setting up a retest of the all-time high from last year. If it goes past $1000 I would expect it to break decisively above. Time will tell...
How will the dollar affect the UK? Expect us to make another special effort to debase our currency! I've got a clever idea - why don't we just print the money to pay for our £200bn unsustainable government overspend? Straight out of the Robert Mugabe book of clever ideas...
Mainstream economists are lauding the US and UK for leading the race to the bottom. But history tells us that the short-term winner always ends up being the long-term loser. We really are thick as a nation...!
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