High USD implications

The USD kissed 100 last night and sits at 99.72 as this is written, a 12 year high.  Spurred on by rising expectations of an earlier US rate rise and a crashing Euro, the high dollar continues putting downward pressure on the gold price.  A lot of talk is about how this affects the US as it grapples with a double whammy of potentially rising rates and the export trade headwinds a stronger dollar presents.  Economic commentator Jim Rickards summarises below the implications outside of the US borders too…

"Foreign corporate borrowers have borrowed over $9 trillion in U.S. dollar denominated debt. But neither they nor their central banks print dollars. When you are foreign and you borrow in dollars, you are effectively "short" the dollar because you have to acquire them to pay back your debt. As with any short position, if the price goes up, you lose your shirt. So, as the dollar gets stronger, these borrowers are losing their shirts because they have to acquire more expensive dollars to pay back their loans. If banks want more collateral on these loans, that works like a margin call on the losing short position. If the distress gets worse, a panic could emerge and a full-blown liquidity crisis will happen.” 

"Big difference between now and 2008 is that in 2008 and 2009 the central banks bailed out everyone. But central bank balance sheets are still bloated, so the question now is who will bail out the central banks? Answer: the IMF"

Jim’s IMF inference is the much anticipated introduction of the already existing SDR global currency as a new reserve, and likely backed by gold.  It also partly explains the de-(US)dollarisation that is occurring globally, down to 61% from 70% just in that last decade.

The graph below (2 days old) shows 3 years of USD pricing and the extent to which the USD is overbought at present.  This all makes for some wonderful buying opportunity in gold in the meantime though…

Rickards also quipped this morning on twitter – “If the Euro falls any more, the Greeks won’t have to go back to the Drachma [Greece’s pre Euro currency].  The Euro will be the Drachma.”