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On the U.S. Dollar, Europe Sings a Classic Meatloaf Hit, Two Out of Three Ain't Bad

Currencies / US Dollar Oct 20, 2009 - 04:28 AM GMT

By: Mike_Shedlock

Currencies

Best Financial Markets Analysis ArticleSeriously, ECB president Jean-Claude Trichet cannot possibly be serious when he says Europe Takes U.S. Strong-Dollar Policy Seriously.


European Central Bank President Jean-Claude Trichet said officials in the euro area take seriously the U.S. commitment to prevent the dollar from depreciating too much.

“We all note with considerable attention the statements made by American authorities as regards their support in favor of a strong dollar,” Trichet told reporters in Luxembourg late yesterday after a meeting of European finance ministers. He also echoed the Group of Seven statement that “excessive volatility and disorganized developments in the exchange market was bad for economic development.”

Luxembourg Treasury Minister Jean-Claude Juncker, who led the meeting of euro-area finance chiefs, said the ministers “discussed exchange rates extensively,” adding that “it’s a problem which worries us.”

“We want a strong dollar, we need a strong dollar,” French Finance Minister Christine Lagarde told journalists yesterday after the meeting. “We must remain disciplined” on our message, she said.

Two Out Of Three Ain't Bad

I hope you recognized the tune. French Finance Minister Christine Lagarde is singing Two Out Of Three Ain't Bad

I want you, I need you
But there ain't no way I'm ever gonna love you
Now don't be sad
'Cause two out of three ain't bad

The song Two Out Of Three Ain't Bad has an interesting history. It was inspired by Saturday Night Live comedienne Gilda Radner who was a Meatloaf fan. She approached Meatloaf, who typically sings only hard rock numbers and asked "Why can't you just do a simple love song? I want you, I need you, I love you."

Two Out Of Three Ain't Bad was the result. Now decades later we get to hear Europe singing that very same tune.

Sorry Christine, Meatloaf's version was better.

Strong Dollar Policy Examined

The US strong dollar policy precedes Geithner and Paulson, back to Treasury Secretary Snow (if not long before that).

Please consider Treasury Secretary Snow reiterates strong dollar policy.

AP Worldstream
12-03-2004
Dateline: NEW YORK
U.S. Treasury Secretary John Snow reiterated Friday that the Bush administration has a strong dollar policy.

Snow's comments, made in an interview with CNBC, came as the dollar sat at an all-time low against the euro and near a 4 1/2-year low against the yen.

Asked if the administration has a policy of benign neglect toward the U.S. currency or if it still has a strong dollar policy, Snow said, "Well of course, there has been (a strong dollar policy) and it continues. It's the rock solid foundation of our policy."

Strong Dollar Policy Thesis

There you have it. The strong dollar policy is the rock solid foundation of the strong dollar policy.

You can't make this stuff up.

The US strong dollar policy consists of nothing but yapping about it. That was true with Snow, with Paulson, and now Geithner. It is beyond incredulous to believe that Trichet is serious when he says he believes the strong dollar policy. If he really believes what he says, he is unfit to be head of the ECB.

Nonetheless, I have recently become bullish on the Dollar. And every day, as the dollar declines I get several emails asking me if I have changed my tune.

No I haven't. However, unlike Trichet and French Finance Minister Christine Lagarde, I do not need a strong US dollar. If the dollar goes to hell, I am quite confident that gold will soar and I am positioned for that.

Q&A on the Dollar and Gold

  • I still think a significant bounce in the dollar is coming. Might I be wrong? Yes.
  • Are there many dollar bulls? Hardly. About 3% of traders think the dollar will bounce This is about as lopsided as it gets.
  • Will gold decline if the dollar advances? Good question. No one knows. Gold disconnected from the dollar in 2005 and it could easily do so again. So perhaps it does and perhaps it doesn't. Those who pretend to know are charlatans.
  • Do you have a target on gold? No, I don't. However, I do expect gold to rise in real terms (what it buys). There are two ways gold can rise in real terms: 1) Gold goes up vs. other assets like houses or the stock market. 2) Gold priced in dollars does not move substantially, but asset prices of stocks, houses, etc drop significantly. I expect both to happen, over time (not necessarily now).
  • Why do you like the dollar here? One reason is sentiment as discussed above it is a lopsided as it gets. The other pertains to how US centric most of the US is. Few know about problems elsewhere: 1) European banks are arguably in as bad a shape as US banks because of loans to Latin America and the Baltic states. 2) The love affair with China is more than overdone. China has turned on the printing presses more than the US. Please see How Will China Handle The Yuan? for details. 3) On a trade weighted basis the dollar seems undervalued vs. major components of the US dollar index. 4) Japan is a demographic basket case with shrinking exports, and huge government debt relative to GDP. The Yen is as likely to blow sky high as the dollar.
  • What about the US dollar longer term? Given central banker (worldwide) responses to the credit crisis, it is hard to like any major currency. That of course is a reason to like gold. Bear in mind the US dollar has already collapsed. The dollar index fell from 120 to 70 and now sits near 75. That is a serious collapse. Longer term, if the US does not get its deficits in order, more weakness may be coming. Shorter term, what fundamentals about the US dollar does everyone not understand?

Major money is made on stories buried on page 23 of the Wall Street Journal, stories that are headed to page 1. The US dollar collapsing story is on page one of economic news everywhere. Pray tell who does not know most if not all of the problems of the US dollar?

What everyone knows is often worthless, frequently harmful, and sometimes even wrong.

Fundamentally and sentimentally the dollar is due for a bounce. If and when it does, gold may or may not react, but equities are sure likely to do so, and not in a positive fashion.

For further discussion please consider Three Yahoo Tech Tickers: Deflation, Gold, Stock Market.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

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