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Stop Worrying About the Death of the Petro Dollar

“In July 1944, delegates from 44 nations met at Bretton Woods, New Hampshire – the United Nations Monetary and Financial Conference – and agreed to “peg” their currencies to the U.S. dollar, the only currency strong enough to meet the rising demands for international currency transactions.

Member nations were required to establish a parity of their national currencies in terms of the US dollar, the “peg”, and to maintain exchange rates within plus or minus one percent of parity, the “band.”

What made the dollar so attractive to use as an international currency was each US dollar was based on 1/35th of an ounce of gold, and the gold was to held in the US Treasury. The value of gold being fixed by law at 35 US dollars an ounce made the value of each dollar very stable.

The US dollar, at the time, was considered better then gold for many reasons:

  • The strength of the U.S. economy
  • The fixed relationship of the dollar to gold at $35 an ounce
  • The commitment of the U.S. government to convert dollars into gold at that price
  • The dollar earned interest
  • The dollar was more flexible than gold

There’s a lesson not learned that reverberates throughout monetary history; when government, any government, comes under financial pressure they cannot resist printing money and debasing their currency to pay for debts.

Lets fast forward a few years…

The Vietnam War was going to cost the US $500 Billion. The stark reality was the US simply could not print enough money to cover its war costs, it’s gold reserve had only $30 billion, most of its reserve was already backing existing US dollars, and the government refused to raise taxes.

In the 1960s President Lyndon B. Johnson’s administration declared war on poverty and put in place its Great Society programs:

  • Head Start
  • Job Corps
  • Food stamps
  • Medicaid
  • Funded education
  • Job training
  • Direct food assistance
  • Direct medical assistance

More than four million new recipients signed up for welfare.

During the Nixon administration welfare programs underwent major expansions. States were required to provide food stamps. Supplemental Security Income (SSI) consolidated aid for aged, blind, and disabled persons. The Earned Income Credit provided the working poor with direct cash assistance in the form of tax credits and welfare rolls kept growing

Bretton Woods collapsed in 1971 when Nixon severed (known as the Nixon Shock because the decision was made without consulting the other signatories of Bretton Woods, even his own State Department wasn’t consulted or forewarned) the link between the dollar and gold – the US dollar was now a fully floating fiat currency and the government had no problem printing more money. With gold finally demonetized the US Federal Reserve (Fed) and the world’s central banks were now free from having to defend their gold reserves and a fixed dollar price of gold.

The Fed could finally concentrate on achieving its mandate – full employment with stable prices – by employing targeted levels of inflation. The Fed’s  ‘Great Experiment’ had begun – the objective being a leveling out of the business cycle by keeping the economy in a state of permanent boom – gold’s “chains of fiscal discipline” had been removed.

But there was a problem – because of the massive printing of the US dollar to cover war and welfare reform costs Nixon worried about the strength of his country’s currency – how do you keep the U.S. dollar as the world’s reserve currency, how do you keep demand strong, if one you remove gold’s backing and two print it into oblivion?

Recognizing that the US, and the rest of the world, was going to need and use more oil, a lot more oil, and that Saudi Arabia wanted to sell the world’s largest economy (by far the US) more oil, Nixon and Saudi Arabia came to an agreement in 1973 whereby Saudi oil could only be purchased in US dollars.  In exchange for Saudi Arabia’s willingness to denominate their oil sales exclusively in U.S. dollars, the United States offered weapons and protection of their oil fields from neighboring nations.

Nixon also abolished the International Monetary Fund’s (IMF) international capital constraints on American domestic banks. This allowed Saudi Arabia and other Arab producers to recycle their petrodollars into New York banks.

Global oil sales in U.S. dollars caused an immediate and strong global demand for US dollars – the ‘Petrodollar’ was born.

By 1975 all OPEC members had agreed to sell their oil only in US dollars in exchange for weapons and military protection.

“In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars…”

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Yen Driven Lower as G-20 is Unapposed to Easing Policies

“Japanese Finance Minister Taro Aso said that Japan’s policies went unopposed at a Group of 20 nations’ meeting in Washington, driving the yen lower in the absence of any roadblock for the nation’s monetary stimulus.

Japan explained that its easing is for price stability, Aso told reporters. Central bank Governor Haruhiko Kuroda earlier said that nations understand Japan’s stance, indicating that he expects no censure. The currency traded at 98.59 per dollar as of 3:04 p.m. in Tokyo, down 0.4 percent.

The G-20 will affirm a commitment to avoid competitive devaluation without singling out any nation, according to a draft statement seen by a Bloomberg BNA reporter. The yen has dropped about 20 percent against the dollar in the past six months, the biggest loser among 16 major currencies, on plans for unprecedented easing.

“Chances are high that the result of the G-20 meeting will deliver tailwinds for Japan and yen depreciation,” said Takahiro Sekido, a strategist in Tokyo at Bank of Tokyo- Mitsubishi UFJ Ltd., who formerly worked at the BOJ.

Aso said “no one” opposed Japan’s policies at the meeting, about two weeks after the BOJ unveiled a plan to ramp up bond buying and double the monetary base by the end of 2014.

Korean Concerns….”

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G-20 Pledges to Not Devalue Currency in Order to Gain Trade Advantage

“Group of 20 nations will affirm a commitment to avoid weakening their currencies to gain a trade advantage, according to a draft statement prepared for a meeting this week in Washington, Bloomberg BNA reported.

The statement, seen by a Bloomberg BNA reporter, maintains a February pledge to “move more rapidly toward more market- determined exchange rate systems and exchange-rate flexibility” and to refrain from competitive devaluations. Meetings of finance ministers and central bankers start today….”

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The Aussie Dollar Falls as Central Bank States Easing is Working

“The Reserve Bank of Australia reiterated that the inflation outlook gives it room to reduceborrowing costs to a record even as earlier cuts boost demand.

“Interest-sensitive parts of the economy were responding to the historically low levels of lending rates and it remained likely that this had further to run,” minutes of the April 2 meeting released in Sydney today showed. “At the same time, the factors weighing on the economy — including the high exchange rate, the waning growth of mining investment, and fiscal consolidation — were likely to persist. The key issues were what the balance of these factors would turn out to be.”

Governor Glenn Stevens and his board held the cash rate at 3 percent after reducing borrowing costs in six steps for a total of 1.75 percentage points in the 14 months through December. Policy makers are trying to buoy industries outside of mining and are grappling with a currencythat has reached its highest level on a trade-weighted basis since early 1985.

“Members again noted that the exchange rate remained high despite the terms of trade having declined significantly since peaking about 18 months earlier,” the minutes showed, referring to a measure of export prices relative to import prices.

The Australian dollar weakened to $1.0328 as of 11:37 a.m. in Sydney, from $1.0338 before the announcement, paring its advance from $1.0313 yesterday in New York.

Stevens is aiming to rebalance a two-speed economy, where mining regions in the north and west thrive while manufacturers, builders and retailers in the south and east struggle. He has said the loosening of monetary policy is designed to offset some of the drag on growth from the currency and spur industries including construction.

Stronger Housing…”

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The Aussie and New Zealand Dollars Conrinue to Rally on Positive Data Out of China

“The Australian and New Zealand dollars were set for a weekly gain as the bigger nation’s Treasurer Wayne Swan said he’s optimistic about China’s outlook.

The so-called Aussie was near a three-month high before Chinese data next week forecast to show the world’s second- largest economy grew last quarter at the fastest pace in a year. The New Zealand dollar’s value relative to its trading peers was close to an all-time high amid speculation the Bank of Japan (8301)’s monetary easing will encourage domestic money managers to increase their investments overseas.

“The Australian and New Zealand dollars are likely to remain resilient,” said Kengo Suzuki, a currency strategist at Mizuho Securities Co. in Tokyo, a unit of Japan’s third-biggest financial group by market value. “The rising optimism toward China’s economy is underpinning both currencies.”

Australia’s dollar added 0.1 percent to $1.0550 at 4:39 p.m. in Sydney after reaching $1.0582 yesterday, the strongest since Jan. 11. It has gained 1.6 percent this week, set for the biggest five-day advance since the period ended March 15.

The New Zealand dollar, known as the kiwi, fell 0.1 percent to 86.22 U.S. cents. It has risen 2.3 percent since April 5, poised for the biggest weekly advance since the period ended June 15.

The kiwi’s trade-weighted currency index climbed to a record 79.67 yesterday, according to data from the Reserve Bank of New Zealand going back to 1985. It’s at 79.17 today.

China’s Economy

China’s gross domestic product probably expanded 8 percent in the three months ended March 31 from a year earlier, the fastest growth since the first quarter last year, according to the median estimate of economists in a Bloomberg News survey. The figures are due for release on April 15…..”

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Bitcoin Meltdown Caused by Massive Interest in the Digital Currency

“The Bitcoin correction we wrote aboutyesterday was not caused by a DDOS attack on one of the largest Bitcoin exchanges, Mt.Gox, but rather by a massive spike in interest in the crypto currency, according to Mt.Gox.

During trading yesterday the value of Bitcoin plummet by 60%, dropping from a high of $265 to around $150 (at the time of writing it has climbed back up slightly, to around $180). As the value of Bitcoin dropped, San Francisco-based exchange called TradeHill claimed the fall was a result of distributed denial of service attacks on Mt. Gox and Bitstamp.

But Mt.Gox has now posted a notice on its Facebook page explaining the dramatic dive as the result of too much interest in Bitcoin. As its infrastructure slowed down under the volume of new users crowding in, it said the resulting lag then caused traders to panic and sell off currency — triggering the drop.

Earlier this month the Tokyo-based exchange was hit by a DDOS attack — which it said had caused its “worst trading lag ever“. But this time the lag was caused by the Bitcoin goldrush, and existing investors’ fearing a Bitcoin bubble….”

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Bitcoin Becomes Oh Shitcoin

It looked like a Garvestone Doji was forming on Tuesday, but we had a parabolic spike yesterday to $260 with a reversal down to the low $100s closing at $180.




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The Yen Takes a Rest From Free Fall to 100

“The yen halted a decline that took it to within 0.1 percent of 100 per dollar after official data showed Japanese investors sold foreign bonds.

The yen was supported as a technical indicator signaled the currency may pare its 6.6 percent loss against the greenback since the Bank of Japan (8301) expanded monetary easing last week. Australia’s dollar halted a five-day gain versus the yen after the nation’s unemployment rate unexpectedly rose. South Korea’s won appreciated for a third day after the central bank kept its key rate unchanged….”

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The Aussie Dollar Falls as Unemployment Unexpectedly Hits a 3 Year High

“Australia’s dollar slid versus its major peers after data showed the nation’s unemployment rate climbed to a three-year high, fanning speculation the Reserve Bank will lower borrowing costs to support growth.

The yield on Australia’s benchmark three-year note fell, snapping a two-day gain. The New Zealand dollar touched 86 U.S. cents for the first time in 1 1/2 years after reports showed the nation’s manufacturing industry expanded last month and a gauge of home prices advanced to a record.

“We’ll probably see weakness on the crosses for the next couple of days, as the view on a recovery in the Australian labor market remains challenged, and also the RBA retains its easing bias,” said Andrew Salter, a Sydney-based foreign- exchange strategist at Australia & New Zealand Banking Group Ltd. (ANZ), referring to Australia’s dollar against its peers.

The Australian dollar lost 0.2 percent to $1.0520 as of 4:57 p.m. in Sydney. The New Zealand dollar, known as the kiwi, rose 0.2 percent to 85.91. The climb to 86 was the first time for the currency since August 2011.

Australia’s three-year note yield fell two basis points, or 0.02 percentage point, to 2.81 percent. It slid to 2.75 percent on April 8, a level unseen since March 5.

The nation’s jobless rate rose to 5.6 percent last month, the highest since 2009, from 5.4 percent in February, the statistics bureau said in Sydney today. The number of people employed dropped by 36,100, compared with the 7,500 decline estimated by economists in a Bloomberg News survey.

RBA Outlook

Swaps traders see a 61 percent chance that the Reserve Bank of Australia will cut the benchmark rate from 3 percent by October, according to data compiled by Bloomberg on overnight- index swaps. The probability was 57 percent yesterday.

New Zealand’s Performance of Manufacturing Index was 53.4 in March, remaining above the 50 level which indicates expansion for a sixth month, Bank of New Zealand and Business New Zealand reported….”

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UBS: Yen Could Rise to 125 Against the Greenback

“The yen could breach its 2007 pre-credit crisis high of 125 versus the dollar if the Bank of Japan expands its aggressive asset purchase program further, a UBS research note said on Wednesday.

“The strongest upside risk to our new USDJPY forecasts will come if inflation remains stubbornly in deflationary territory despite the BoJ’s new easing this month,” wrote UBS economist Larry Hatheway.

“That will force the central bank to consider buying more assets in future including equities and even foreign bonds. In those scenarios, USDJPY would likely breach its pre-credit crunch 2007 highs of 125.” …”

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The Pound Sterling Rises Against The Dollar on Expectations Triple Dip Recession Will Be Avoided

“Sterling rose toward a six-week high against the dollar after U.K. industrial production increased in February more than economists forecast, boosting speculation the nation will avoid a triple-dip recession.

U.K. 10-year bonds declined for a second day after an auction of the securities attracted the lowest demand since June 2012. Sterling gained versus all but three of its 16 major peers after a gauge of manufacturing rose. The pound has climbed 1.9 percent in the past month, paring its decline this year to 4.3 percent, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies, the second-worst performer after the yen.

“The production figures seem to have been taken very well,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “Now that sterling has firmly handed its crown of whipping boy over to the yen it is good to see it get a bit of a boost from good figures. We think that triple-dip recession will be avoided.”

The pound rose 0.3 percent to $1.5301 as of 11:35 a.m. London time. It reached $1.5363 on April 5, the most since Feb. 20. Sterling climbed 0.1 percent to 85.18 pence per euro, after reaching 85.60 pence, the weakest since March 25.

U.K. industrial production expanded 1 percent in February, after dropping 1.3 percent the previous month, the Office for National Statistics said. The median estimate of 30 analysts in a Bloomberg News survey was for a rise of 0.4 percent. A similar report for the manufacturing industry showed an increase of 0.8 percent….”

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Thailand’s Currency the Baht is Popping Off Japanese Easing

Thailand’s baht jumped the most in 10 months, breaching 29 per dollar for the first time since 1997, as demand for the nation’s bonds rose amid unprecedented monetary easing in Japan. Stocks dropped to a two-month low.

The currency jumped 1 percent from its April 5 close to 29.02 against the greenback as of 4:51 p.m. in Bangkok after reaching 28.93 earlier, according to data compiled by Bloomberg. That’s the biggest advance since June 4. The yield on sovereign debt due June 2023 fell three basis points to 3.46 percent, the lowest level since Nov. 6. Local financial markets were shut yesterday for a holiday.

Today’s baht gains were “too fast” and the Bank of Thailand is ready to intervene if the currency’s moves are not consistent with fundamentals, Governor Prasarn Trairatvorakul said in Bangkok. Capital controls are not being considered, he added. Global funds bought $292 million more Thai government debt than they sold last week, adding to net purchases of $9.6 billion in the first quarter, official data show. That compares with $31 billion for the whole of 2012.

“With floods of cash in Japan where rates are so low, investors are seeking higher returns and in this region, Thailand looks good thanks to its stable economy and political situation,” saidTsutomu Soma, manager of Rakuten Securities Inc.’s fixed-income business unit department inTokyo. “And the weaker yen won’t be harmful for Thailand as it doesn’t compete with Japan, unlike South Korea or China.”

Best Performer…”

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