The dollar has fallen against the euro to its lowest level in a year:
Sept. 22 (Bloomberg) — The dollar weakened for the first time in three days against the euro and fell to the lowest level in a year as signs that the global economy is recovering spurred investors to buy higher-yielding assets.
The U.S. currency declined the most versus the New Zealand and Australian dollars among major currencies after the Asian Development Bank said regional economies will expand this year faster than initially forecast. New Zealand’s dollar climbed to a more than 11-month high against the yen after the nation’s current-account deficit shrank to the narrowest level in more than four years.
“We expect to see further weakness in the dollar in coming months,†said Ian Stannard, a currency strategist in London at BNP Paribas SA, France’s biggest bank. “There are a number of factors at work against the dollar, and those include improving global economic conditions and a return of risk appetite.â€
Really? Then why have gold prices risen against all major currencies? Shown above is a 30 year graph of gold prices. As you can see, it’s at historic highs. Gold is the holding of last resort; holding gold doesn’t signal an increasing appetite for risk but rather a flight from risk.
I agree with Mr. Stannard that there are a number of factors involved. For one thing I suspect that China is hedging its bets by buying gold.
I think that the rising gold prices illustrate a widespread vote of no-confidence in the willingness of world leaders to tackle the economic problems that are bedeviling us in a way that inspires confidence. That isn’t a political judgment. Tim Geithner is following the path blazed by his predecessor Hank Paulson. I don’t think there’s a Bush economic policy that contrasts with an Obama economic policy. I think there’s a Bernanke/Paulson/Bush/Geithner/Obama economic policy and people all over the world are worried about it.
Gold prices may reflect Chinese hedging as you suggest, and perhaps inflationary expectations amidst a resumption of growth. Here is a contrarian view:
The FDIC watch list is a mess, and probably understated. The banks are still in need of raising capital……or the inverse, restraining loan growth. And we all know what that means: no credit, no growth. A quick inspection of the Board of Governors loans and leases chart (tracked from 1947) shows an unprecedented shrinking (as opposed to going sideway for awhile).
That’s not good.
And I didn’t even mention that consumer loan chargeoffs are at about 2x the 1990 pace, and the commercial loan refi problem is still on the horizon.
All together this makes deflation and a double dip seem more likely than inflationary concerns. Gold may stand up relatively well due to its role as a sink for flight capital. The stock market not so much. None of this will play out in the next 2-3 months as the stimulus continues to trickle out and people take the head fake. But early 2010 could be a real problem.
I think that those who see growth ahead or, at least, robust growth are confusing lightning bugs with the lightning.
PS –
I understand the general thrust of the comment about Pres. Bush and Pres. Obama economic policies, say, on bailouts. But as someone who is immersed in the world of small business and small business owners (we’re talking $30 MM – $250MM in revenue) I can tell you that Pres. Obama’s embracement of green philosophy, the health care push and his licking his chops to implement an income tax increase are all serving to have a chilling effect. These policies ar al looked at as a drag.
Put aside for the moment any personal opinions on the merits of AGW theory or health care insurance needs etc. As an empirical fact Pres. Obama has small business owners in a state of suspension.
For better or worse he’s in the Big Chair right now; he sets the tone, and the tone he is setting is not being received well.
I agree with the point that the Obama Administration is fomenting a condition of uncertainty and that’s harmful to the economy. I think it’s mostly part of the “continuous campaign”. President Obama still wants to be seen as “not Bush” while largely embracing the same policies as the Bush Administration (eventually) did.
Consider, for example, that the “energy bill” hasn’t been passed, may never be, and, if passed, may not include “cap and trade”.