As crude oil fell in price, the U.S. dollar gained strength against the euro. The dollar traded at $1.4137 per euro, up from $1.4183 earlier last week. In fact, days after hitting its lows for the year due to the demand for riskier assets and a move away from safe haven plays, the U.S. dollar promptly did an about-face on Friday and moved higher against the euro and the Japanese yen after the economic numbers were released.
Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York said, "The tight inverse correlation between the dollar and equities is potentially easing, and we are not seeing wholesale dollar selling. If so, relative economic performance will become increasingly important and on that basis, we still expect the Dollar can outperform the Euro and Yen in the month’s and quarter’s ahead."
Even so, investors need to also worry about the increasing debt. According to David Wessel of The Wall Street Journal, “So far, the U.S. government has been able to borrow huge sums, a lot of it from abroad. In times of crisis, foreigners flee to the security of the U.S. government’s debt. But this won’t go on forever, and the U.S. government — indeed, the entire U.S. economy — needs to move towards living within it means.”
Best-selling author Kevin Phillips, of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, concludes that “a commodities cycle probably started early in this decade and is only being masked now by recession, presaging a repeat 1970s style inflation.”
Phillips says:
The danger is that the great unwind – the unraveling of the mammoth buildup of debt – is under way. If that predominates, Bernanke's theory is you're going to have deflation. My theory is that if we are in a commodities cycle, what you will get will be more like 1973-74-75... where as soon as the recovery begins you get rising inflation because you're going to play havoc with all money supply and liquidity that's been unleashed.
“The danger of inflation is real,” confirms currency expert Harinder Singh of Currency Profits Trader.
Harinder adds, “We must also recognize that in the very long term, the U.S. dollar has serious problems, even though in the near term a correction is expected. The consensus among speculators is only 3% bullish for the dollar, and that is at a record low. This indicates warning signs of a trend change.”
Harinder Sing is a 25-year veteran of the currency markets and now is chief analyst for Currency Profits Trader.
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