Rising Dollar will Continue to Create Havoc with Global Capital Markets
April 28
The post crash party is over for the world equities, debt and commodities markets as all countries and regions of the world will have to make adjustments to the rising U.S. Dollar and collapsing Euro and the European economy.
Yesterday on April 27th the Dow Industrials Composite Index plummeted by over 213 points to back below 11000 and the S&P fell by over 28 points to back to below 1200 after Standard & Poors lowered Greece’s credit rating to junk status and lowered Portugal’s by two notches. To make matters worse for Europe polls indicate the United Kingdom’s elections for a new Prime Minister, etc., will likely result in a hung parliament.
News media widely reported that the sell off in European government bonds or sovereign debt sparked the significant sell offs for all global stock exchanges. However, I differ from the current consensus as to the cause of the sell off. There is no doubt in my mind that the sell off was motivated by the Euro hitting its lowest point in more than a year against most currencies and especially the Dollar yesterday. Its currently down more than 12% from its recent peak against the Dollar on November 30, 2009. From here I believe that the Euro will fall by sometime in May back to the lows it had against the U.S. Dollar in October of 2008 and those lows preceded the crash. After that I expect that the Euro could trade at parity to the U.S. Dollar by the end of year and head to new all time lows against the greenback in 2011.
What I said in my February 10, 2010 post “The Damage to the Euro has been Done” at on BearMarketTracker.com was as follows:
“Investors should pay very close attention to the collapsing Euro. Since its inception in 1999 it has a history of volatility or price swings, which have pre-empted the peaks and troughs of the major U.S. stock market indices including the S&P 500 and the Dow 30 Industrials. The Euro’s steep declines versus the Dollar in the late summer of 2008 and winter of 2009, precipitated the crashes in the U.S. stock market which occurred in the Fall of 2008, and the Spring of 2009, respectively. Even the bursting of the dot com bubble in April of 2000 and the ensuing economic downturn in the U.S. can be blamed on a steep 15% decline in the Euro which began on January 3, 2000. These sell offs in U.S. stocks, which followed sudden and sharp upturns of the U.S. Dollar, were sparked by professional investors and analysts. They knew all too well that the sudden spikes in the Dollar meant that the prices of U.S. manufactured goods would have to go up and demand for them by foreigners would go down with the likely result being a U.S. economic downturn or a recession.
Sharp and sudden declines in the Euro have proven to be accurate leading indicators of market U.S. market crashes and economic downturns since the Euro’s inception in 1999. My argument is that it was the sharp decline of the Euro, which began in August of 2008, from off of its all time highs against the U.S. Dollar, which ignited the crash of the U.S. stock market in September of 2008. My belief is that it was the increased volatility of the Euro and its sharp and sudden sell off and not the sub prime debt problem, which caused the failures of Lehman, Merrill Lynch and AIG. The flight to safety in the Dollar and the increasing probability of a U.S. recession drove investors to dump the shares of all U.S. financial companies.”
As I have been saying since May of 2009, report “Safe Haven Status of U.S. Delays Recovery” the weakening of the Euro and the strengthening of the U.S. Dollar would become the biggest concern of the Obama administration and politicians worldwide. The problems stem from the fact that every commodity is priced in U.S. Dollars and that the spike of the U.S. Dollar against the Euro will not only cause another economic downturn in the U.S. by the end of 2010. The spike will significantly increase the prices that foreigners will have to pay for U.S. manufactured goods and will also wreak havoc with China’s economy because its currency is closely tied to the U.S. Dollar.
Just when it appeared that the U.S. economy was making a significant recovery President Obama, all of his economic team, and the U.S. Congress will now have to deal with an even bigger and more complex economic problem than the banking crisis. They will find that it will be much more difficult to manipulate a global decline in the U.S. Dollar versus other currencies such as the Euro than it was to manipulate the U.S. banking system. I predict that the outcome will be the onset of global trade wars, tariffs and nationalism. For more on why I believe that the U.S. is currently in a Super Bear market and why I expect it to last until 2015 at the earliest go to www.bearmarkettracker.com.
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