The US Dollar

This is a topic I have wanted to write on for awhile and finally made sometime.

Over the past two years it has been difficult to ignore the rise in the US Dollar. For some (me included), it is somewhat bewildering. You have the worlds largest ever debtor (over 19 Trillion in debt!), money printing that has spanned around four years and interest rates were at zero for almost a decade. However, on the mere hint of a rate increase, from 0-0.25% to 0.25-0.5%, the USD has soared.

Source: www.danericselliottwaves.blogspot.com

The above chart shows the USD Index before the breakout to the upside.

Despite the Zero Interest Rate Policy (ZIRP), Quantitive Easing 1, 2, and 3, Operation Twist and endless government borrowing, the USD failed to fall below its 2008 pre financial crises low. Instead of other countries following a responsible monetary policy (i.e not following the US down the worm hole), they implemented their own money printing schemes. This was the birth of the Currency Wars. At the time, I believed the US was going to win, that is debase their currency the quickest. But as the chart shows, the UK, Japan, Switzerland and the EU, among others, were 'better' at it.

Source: www.danericselliottwaves.blogspot.com

The above chart shows the remarkable rise in the USD Index.

South Africa and Brazil are the most obvious mismanaged economies with major Monetary Policy mistakes from countries in the developing world.  Instead of allowing their respective currencies to rise, not propping up the USD, they fought their rising currencies on multiple fronts (intervention in the FX market, cutting rates, government spending). They forwent higher standards of living and keeping their economies on a sound footing in exchange for depressing their currencies. Inflation would not have undermined their citizens savings and the government would not have been able to go on a borrowing spree. Instead they also adopted an expansion monetary policy, which has seen their economy unable to cope when the tightening cycle started and everyone run back into the US Dollar. The piper must always be paid and it is now pay day. South Africa and Brazil are paying for this misguided policy.

The US has not even started tightening in the true sense, they have just talked about decreasing the stimulus and this was enough the propel the USD to ten year highs. True tightening would see the UD Fed first sell (or cease rolling over) their bond portfolio. No word on this happening yet.

The lessons of this story is that no country sets their monetary policy in isolation. Where the US goes, the world will follow. While the US has raised rates, while the other mayor world economies have not followed, the question is when will the US admit they made a major policy error. The other major Central Banks are trying to force the hand of the US Fed by further reducing interest rates, causing the USD to rise even more. The Currency Wars are not over and the winner is the one to depress their currency the most. There will only be one survivor, the money of the last 5000 years.