With U.S. deficits skyrocketing, along with mushrooming money supply, I can’t see how the dollar can rise much further. The dollar may have gotten a shot of steroids at last week’s World Economic Forum in Davos, Switzerland, where the U.S. dollar was in the spotlight. For instance, China’s Premier Wen Jiabao called for more regulation of “major reserve currencies” (i.e., the dollar), while Russia’s Prime Minister Vladimir Putin called over-reliance on the dollar “dangerous.” Putin bluntly called for the development of multiple, regional reserve currencies. Putin also mocked U.S. businessmen, who (he said) had boasted last year at Davos about the U.S. economy’s fundamental strength and “cloudless” prospects.” He gleefully mocked Wall Street by saying “Today, investment banks, the pride of Wall Street, have virtually ceased to exist.”
China’s leader was more diplomatic, but he was just as critical of the U.S. for its “unsustainable model of development characterized by prolonged low savings and high consumption, excessive expansion of financial institutions in blind pursuit of profit.” Obviously, the world needs a scapegoat and Wall Street is the easiest candidate. But ironically, the U.S. dollar mocked the critics in Davos by rising strongly last week. Still, I think these dollar critics will be proven right.
What clearly emerged last week was that the foreign leaders in Davos seemed more concerned about deficit spending in Washington D.C. than members of Congress were. Our government’s “stimulus” (spending) bill confirms my belief that the U.S. dollar will likely suffer as Treasury auctions get bigger and the federal budget deficit spirals out of control. In a reversal of historical roles, the U.S. is even coming under criticism from Mexico for its fiscal irresponsibility! Ernesto Zedillo, former Mexican president (who helped solve his country’s financial crisis in the 1990s), said “The U.S. needs to show some proof that they have a plan to get out of this fiscal problem.”
The massive Treasury refinancing of $78 billion was met by a lack of bidders, with a less than 2-to-1 bid-to-cover ratio (3-to-1 is ideal), forcing Treasury yields to rise again. In fact, January was the worst month for bonds since 2004 as rising Treasury yields sent the value of the underlying securities plummeting. And when the non-stimulating stimulus package is passed by the Senate and signed by President Obama, these Treasury refinancings could become a disaster. Higher rates could also cripple the already-injured U.S. housing market.
The other gossip from Davos is that since free-wheeling U.S.-style capitalism is under siege, the European system (with more regulation and social safety nets) seems to be suddenly superior. I attribute this new bias to the fact that many corporate executives were absent from Davos this year, so that government officials, especially from Europe, overpowered the 2009 Davos Forum.