This is what we wrote on 30 Aug 2008. The EURUSD was at 1.48.
“Though immediate targets for Dollar lie near 1.45 levels (EURO-USD), we are anticipating a multi month of strengthening back to January 2005 levels sub 1.4. This means that our case of commodity weakness and multi month of global equity reprieve starting October 2008 remains valid.”
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The influence of Dollar on various assets is very high. How it influences us this time around, however remains to be seen.
Understanding Dollar is as important as understanding commodity, equity and bond cycles. The currency is a global benchmark and it is this Dollar link that completes the economic cycle as assets interact with each other. Unfortunately we do not pay much attention to this link. The geographical bias, lack of inter-market knowledge, single asset focus and cycle blindness restrains our understanding of the currency.
The Dollar is as important as Gold. The two assets mirror each other and run contrary. If Gold strengthens, Dollar weakens and vice versa. It is the classic interaction between the tangible and intangible. Gold and commodities being the hard or tangible assets and the Dollar being the intangible or paper asset. Cash is an important aspect of the society and even if we are moving ahead to a more inflationary time, understanding cash cycles was never more important. Rather there have been times Gold was given less importance than the Dollar. In 1928, D H Robertson said, “The value of the yellow metal, originally chosen as money because it tickled the fancy of savages, is clearly a chancy and irrelevant thing on which to base the value of our money and the stability of our industrial system”. The quote more relevant then might seem so out of place today. But, the choice between Gold and Dollar is as cyclical as ever.
The American experience shows how debates about the nature of money, the control of the amount of money in circulation and how the relationship between Gold, Silver and Paper had moved to the central of political stage in the nineteenth century. This was a new phenomenon in the history of money caused by the extensive development of paper money and the constantly changing economic and political conditions of the modern world. In the book, ‘Money, A History’, Catherine Eagleton and Jonathon Williams explain how on one side it was the economic disasters linked to uncontrolled issue of paper money and on the other side a metal that faced vagaries of increased supply or a chanced discovery.
Though we have managed some of the old problems of the economic society, we are still moving in and out of an implicit Gold standard. And in some ways the Dollar is more important than Gold today. Important in terms the exposure we have to Dollar compared to Gold. The industrialisation of the global economy and consumerism of commodities are at a historical high. So, we have moved from the classical Dollar and Gold equation to Dollar and consumption as a whole. Dollar is the global cash proxy today. Even if we deny it, a Dollar strengthening or weakening of a few months can impose reversal in trends of global assets. Econohistory is replete with incidents of cycles in the debasement of currency and currency crisis. There are cycles from 18 years, 54 years, 108 years and 300 years. These patterns have been dominant back through time to the era before Christ.
Dollar weakness started at the base of the commodity cycle in 2000. While commodities soared, Dollar lost its value. In ‘The gold cycle’, we talked about a primary pause in commodity cycle. And in October 2007 (The Rupee Correlation) we said, “The big surprise always happens when people least expect it. We do not see the Rupee appreciating beyond 38, it is a turning point for us. And we are not far from a Dollar surprise as it turns around for a multi-month of strengthening.” This is what happened to the Dollar. Starting March 2008, the Dollar stopped weakening and is nearing back to January 2008 levels. About the Indian rupee, the Indian currency turned from a low at 39 in November 2007 and is back to 44, the 2006 levels.
Though immediate targets for Dollar lie near 1.45 levels (EURO-USD), we are anticipating a multi month of strengthening back to January 2005 levels sub 1.4. This means that our case of commodity weakness and multi month of global equity reprieve starting October 2008 remains valid. There are more reasons why we think that the Dollar strengthening is here for more than a few weeks. There have been prior occasions of marginal Dollar strengthening. But, there are only a few times that other currency pairs and assets also come in focus. The current bout of Dollar strengthening also affected the British Pound, which fell to a two year low. And, both Oil and Gold also witnessed sharp drawdown. This is a classic confluence and comes at a time when the world is waiting for a recession, a financial crisis, Oil at $200 and higher Gold.
Even sentiment against the dollar is at extreme levels. The negativity has also entered mass psychology and magazine covers still question whether the dollar comeback is for real? Investment strategist also mentioned about commodity and oil markets used as hedge against falling dollar. These linkages also break if dollar strengthens and oil drops. It’s only after the trend strengthens that generally trend news starts appearing, like now with American GDP numbers beating analyst expectations at 3.3%. In the process of crying negativity on dollar, the masses forgot that falling currency value also leads to flourishing exports.
We are in unprecedented times, which is no way similar to the discovery of Gold near Sacramento in 1848 when within four years more than 1 per cent of the population of the United States had moved to California. Monetary economics has moved from the central banker, to the state, to the markets ruled by the mob. This time it is the global Gold rush. How Dollar influences us this time around, however remains to be seen.
ORPHEUS RESEARCH AT REUTERS – UNITED KINGDOM
ORPHEUS RESEARCH AT REUTERS – USA
