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What Factors Are Affecting the U.S. Dollar?

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Though "when" may be in doubt, pressure is indeed building for a forced unwinding by the market of all these currency, interest rates, and carry trade distortions.

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Inquiring minds are concerned about the US dollar. Where is it headed and why? Some who think they know just might be surprised by the answers. Let's start with a list of problems and see what affect, if any, they have on the dollar.

The US has major problems, lots of them.

For starters there is an imploding housing bubble, a massive trade deficit, and the latest news is an attempted bailout of Citigroup (C) (See Professor Depew's Special Edition Five Things You Need to Know and Super SIVs: A Fraudulent Attempt at Concealment).

No one can deny that credit expansion as referenced by M3 is exploding. The Fed is also cutting interest rates, and there is talk of massive "printing" by the Fed. Finally there are external pressures such as the carry trade, currency pegs, and sentiment to consider.

Which of those factors are directly affecting the U.S. dollar?

Trade Deficit vs. U.S. Dollar Index

Click here to enlarge.
The above chart is courtesy of Bart at NowAndFutures.

There you have it. There is no discernible relationship between the dollar and the trade deficit. But that does not stop people from bringing it up the trade deficit every day in relation to the U.S. dollar.


The Housing Bubble


The housing bubble in the US is well known, but the bubble in Canada, the UK, China, and Spain is just as big (if not bigger) than the bubble in the U.S. In particular, the bubble in Vancouver is as massive as the bubble in Florida or California ever was. Vancouver housing prices are destined to crash. Don't ask me when, but only fools are buying at these prices. The housing bubble in Australia was the first to start deflating.

The point here is that housing bubbles are practically everywhere you look. So the housing bubble per se is not a cause of the dollar's weakness. However, the Fed's response to the collapsing bubble (lowering interest rates) is another matter. We will get to that shortly.


Monetary Printing: What's the Real Story?

The myth persists that the US is massively printing. This is simply a falsehood as discussed in Is the U.S. Printing Money Like Mad? and Is the Fed Deflating?

Monetary printing can be followed by watching base currency. In the charts below, base money is shown for the US and EU. Where not shown, M1 is the closest approximation. The first chart below dispels the printing myth.

Even if the US is not massively printing, many point to M3 as the reason for the collapse of the dollar. Currencies, however have to adjust relative to other currencies. So the logical question then is "What does M3 look like in other countries?" With that question in mind let's take a look at charts of M3 from a handful of countries. Note that in the UK, M4 is the nearest equivalent of what we call M3, and in China M2+ CDs is the closest approximation.

(The following charts are once again all courtesy of NowAndFutures with anecdotes in red by me.)

M3 US

Click here to enlarge.

M3 EU

Click here to enlarge.


M4 UK

Click here to enlarge.


M2 + CDs China

Click here to enlarge.


M3 India

Click here to enlarge.


M3 Japan

Click here to enlarge.


M3 Growth (Numbers for Russia and Venezuela are figures from the UK Telegraph)

  • Japan 2%
  • EU 12%
  • US 13%
  • UK 14%
  • China 19%
  • India 21%
  • Russia 41%
  • Venezuela 69%


The above numbers indicate the rate of growth of M3 is not a reason for the US dollar to sink, at least in relative terms. Europe and the UK have credit expansion as fast as the US, and China, India, and especially Russia have a much faster rate of M3 growth.

In addition, base money supply (monetary printing) in the EU is soaring at 10% compared to the US at 2%. Base money is currently contracting in Japan. If M3 was the reason for the dollar's collapse then Japan would have the strongest currency of the group. If relative growth in base money supply was the only reason for currency movements, then Japan and the US would have the strongest currencies in the group. (Continue on page 2.)

Please click here to read Page 2 of What Factors Are Affecting the U.S. Dollar?

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