Bryan Rich is the currency go-to guy at Weiss Research, and he has some interesting news about the Federal Reserves’ recent monetary policy statements. There could be big short-term implications for the dollar.
“…the real story was buried in the last paragraph of the December Fed statement and reiterated in their latest statement.
Here’s what it said …
“The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1.â€
Following the Fed’s statement this week, there was a coordinated release of comments from the European Central Bank, the Bank of England and the Swiss National Bank confirming that the swap lines were no longer needed.
For the currency markets, this is a big deal. Yet, few have thought the juicy details of the Fed’s plans on currency swaps are of interest.
But I do. I suspected it was a game changer for the dollar when I was studying the statement last December. And so far, the price action in the currency markets is confirming that.”
Rich argues that it was the currency swaps that pumped the global economy full of dollars, and as a result, we saw significant declines in the value of the dollar vs. other major currencies. But now that the swaps have been closed, we will see a decline in the supply of dollars on the open market, which means the value of the dollar should turn and head in the opposite direction, making it strong against other currencies:
“When they opened these massive swap lines in late 2008, the goal was to alleviate the dollar liquidity crunch at banks around the world. However, in the process they increased the supply of dollars around the globe — a negative consequence for the value of the dollar. But now that these lines will be closed, it’s clearly a dollar-positive development.”
Couple this with other developments in the world such as a stock market correction in the US or China, a military development in the middle east, or the possibility of a PIIGS sovereign default (Portugal, Ireland, Italy, Greece, Spain), and we can see a rush to the dollar similar to that of 2008.
For the skeptics out there, consider that the US Treasury has to issue $1.5 Trillion in new debt this year, and foreign buyers have been slowing down their purchases of our bonds and notes. And this may sound a bit conspiratorial, but if the US government needed to ramp up purchases of US debt, one way to do that would be to make all other assets too risky to hold – and this would be accomplished if stock markets and commodities around the world began to re-collapse.
The resulting effect would be a feedback loop, meaning that any rush into the dollar would push its value higher in terms of other currencies and goods, which would then force stocks, commodities and other dollar denominated assets down.
but…Jim Sinclair has a comment on this article.
http://www.jsmineset.com
Bill, thank you for the link, this was a good, alternate opinion from Mr. Sinclair. I’d recommend that our readers check out Mr. Sinclair’s review of Bryan Rich’s assessments before taking an action insofar as dollar trades are concerned.
Here is the full link directly to Sinclair’s piece: http://jsmineset.com/2010/01/30/misassumptions-concerning-the-argument-for-the-us-dollar-and-gold/
Use any dollar strength to buy gold!
Here’s my take on Jim Sinclair’s comments… and NO, I DO NOT think I’m even 1% as smart as he is, and obviously even less than 1% as successful as a trader… but here goes:
1) Jim said: “The proper conclusion then is if the swaps were to be closed it would impact the short and medium term rates up to one year because it would require the final recipient of the cash to have re-cashed itself miraculously which they have not.”
Yes, I totally agree, on the affect and the short-term nature of it… not sure how he’s disagreeing with the article, he seems to be agreeing to me. Â Maybe I’m just stupid.
2) Jim said:Â “How often has the Federal Reserve informed you of what they intend to do before they have actually done it?”
Uhhhh… I’d say ALL THE TIME!  The Fed’s biggest tool of manipulation is their jawboning.  They’ve been doing it for nearly 100 years, and by simply stating that they might do something, or might act in some way in the future, they change markets.  Anyone who follows the markets and finance knows that every minutiae of the Fed Chairman’s comments are analyzed 26 ways to Christmas… and more importantly, acted upon and have an impact on the market.
3) Jim said:Â The only time you can conclude a swap is closed is by hindsight investigation of balance sheets of both parties.”
True, I suppose. Â But if so, then we should disregard anything and everything the Fed ever says, since it can’t be proven anyway. Â Such a position seems naive.
4) Jim said: “Then you are making a recommendation on the interpretation of MOPE which is usually just what MOPERs wants you to think.”
Yes, and when everyone does that, it has the intended effect… so don’t fight the trend.  Should the markets have gone up from March 2009 until now?  No of course not, but if you listened to people like Chapman and stayed OUT of the markets due to the ridiculously poor fundamentals… they you missed out on a shite-load of money!
That’s my $.02. Â I’m probably wrong, but that’s what I think… let the flaming begin!
Patrick
there is no doubt in my mind that the dollar will rally as just you said the sovereign debt crisis in the eurozone and eastern europe,the china bubble, the coming state and city collapse etc. Its good for people who havent invested in gold,silver,copper,platinum yet cuz they will be cheaper. people have been calling for a correction since august and i think its coming the question is will it be worse then 2008?