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Why is the U.S. Dollar going up in value?

Most of the reports about the huge Metals sell-off (silver from $44 down to $30) are identifying the cause as "strong demand for the U.S. Dollar".

The Dollar index has indeed risen to nearly 78 (from the low-mid 70s), but this raises a few questions here:

1. Why would the U.S. Dollar be rising in value? There has been no credit tightening, no major reductions in U.S. Debt, no end to the U.S. Wars and overseas spending, and no announcements by the Federal Reserve of any big shift in policy. So why the jump-up?

2. The colossal nosedive in Metals is totally out of proportion with the relatively moderate uptick in the U.S. Dollar. So why would Metals crash altogether (and yes I consider a $44 => $30 cliff-dive to be "a crash").

3. Obviously the Metals market is manipulated, but there has been no new big events like Goldman Sachs going bankrupt, or a CitiBank meltdown to shock the market, or trigger some new manipulation like 2008. Yet it sure feels like we are in a deflationary 2008 meltdown. So what explains this?


Thanks in advance for any thoughtful (and detailed) replies.

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The dollar is dear in

The dollar is dear in deflation.

That depends on your "Unit of Account".

If you measure the dollar against other worth-less fiat currencies, which the dollar index does, it's going up in the short term... the best looking horse in the glue factory. However, even if you use the dollar index as your guide, in the last ten years the dollar has declined from a high of 121 to 78 (-35%)... a race to the bottom currency war.

Now use gold as your unit of account. In the past ten years the dollar has declined from a high of 123 mg to an all time low of 16.4 mg on September 6th... that's an 86% decline. Nothing goes up or down in a straight line. There are bear market rallies and bull market corrections. The mid and long term trend for the dollar is down.

"Paper money eventually returns to its intrinsic value -- zero." -Voltaire

A great site to keep track of the dollar measured in gold is: http://pricedingold.com/
His most recent article, "Gold Crash, or USD Bear Market Rally?", will help answer your question.

Well Compared / Presented.

thanks for the comparison, made it so easy to understand.

Because it is only measured against

other fiat currencies.

ecorob's picture

Because as bad as we know it is here...

and as bad as we think it can get, it is worse in Greece, Spain, Portugal, Japan...you get the picture.

So, in the scheme, even though we are bad we aren't the worse so money flows into our treasuries and the "dollar" as a safer haven.

Are we the "save all" for the world? We will see very soon. My money is still in precious metals and commodities for the future.

its 'cos I owe ya, my young friend...
Rockin' the FREE world in Tennessee since 1957!
9/11 Truth.

Here's an explanation

There are actually several reasons why the dollar is strengthening.

1) The Fed has actually signaled that they are tightening credit. Their recent policy statement says they are running a twist, which means that instead of buying up short term debt, they're only going to buy 30 year debt. That holds down mortgage rates, but will allow short term rates to come up from the floor.

2) The overall tanking of the markets. People are selling out of the market, and normally they sell into money markets, bonds, and other safer paper. This paper supports the US Dollar.

3) The commodity bubble popping. Precious metals rose far too fast. Silver went from $8 to $45 in a few years. It was overbought, and has deflated some. It didn't take a huge dollar correction to do this, simply an indication that the dollar was strong was all that was needed to pop this.

4) The real estate market is tanking. This is causing banks to re-write their balance sheets, and many of them are writing down their value. When banks write themselves down, they destroy money. It's only as tangible as erasing a few numbers (or deleting a few zero's) but it has the same effect as burning a bonfire full of cash. It reduces the money supply.

5) A rush to safety out of the Euro. The Euro is in trouble....they are going to be forced to either kick out Greece (and eventually a few others) or let their debt load sink everyone. Neither choice is particularly good news for the Euro, so currency traders escape to the dollar.

This is working like a perfect storm this fall. These factors are strong enough to overcome everything working toward inflation.

Note: I have said it since March...this will be a temporary deflationary environment. I don't see it lasting much past the end of the year, before inflation rears its ugly head again.

The dollar has only gone up 4 cents from....

...its all time lows. It isn't anything to get excited about. We needed a correction in precious metals.

huh? I think you may have a

huh? I think you may have a wrong chart up? the dollar has gone from about 73 to about 78. It has barely budged with a very sick Euro nosediving and the EURO make up 57.4% of the USDX. With as big of a sell off as the metals have had the dollar should have screamed over 90.00 on the usdx. During 2008 the dollar went from around 70 to 89.

I'm not a technical money

I'm not a technical money person at all but wondering if this has anything to do with Europe fleeing the Euro and buying U.S. dollars for their own immediate safety. I read that somewhere and wondering if that would have anything to do with it.

Transfer / $hift.

you are right, that is a major cause, huge sums were transferred, because there is a lot of anxiety and insecurity in the Euro zone, = deficits, defaults, bailouts, etc.
So the Dollar seems safer in the INTERIM, comparatively.
In the long run (& soon) precious metals will win.
PM prices went down to cover loses in other sectors, and because margin requirements were raised at the Exchanges.

PM will bounce back, human perceptions are moving towards them, let the bankster$ try and manipulate, they will fail, get tired, and suffer huge losses in the process. Those who trust and invest in paper will lose heavy. Smart investors are demanding physical possession of metals, = which are really scarce, and they canNot be photo-copied.

It's not real people buying dollars, its massive hedge fund HFTs

It's not real people buying dollars, its massive hedge fund HFTs. Remember, the "market" is not driven by 401k holders, day traders, or individual portfolio watchers. Its driven to the tune of 90% by massive hedge funds and investment "banks". They, in turn, thrive on monetarist credit, the cheap FRNs oozing from the federal reserve.

Lately, they've been fleeing commodities and the Euro in search of something "reasonably" safe. There's only one place to go for these Keynesians: the FRN.

Fear not. They will fly back to commodities as soon as they can. Treasuries pay nothing in interest. Its just a flight of fancy while Europe sorts out their squabbles.

...Of course, soon it will be October, and WWIII will have to [be] start[ed] to take attention away from the Euro-collapse. Look for commodities to "explode" before Halloween.

"Cowards & idiots can come along for the ride but they gotta sit in the back seat!"

Bernanke just sold out on short term money so a large number

of people had to liquidate to raise cash needs for now. Many of these people sold gold and silver to accomodate their needs. What I find interesting is that the dip down to $1550 / oz gold happened in the middle of the Hong Kong business day while Westerners were asleep at night, and it only lasted for an hour before going back up to $1650. Any insider trading would have given China a huge buying opportunity while westerners continue to impoverish their savings just to raise cash for their sinking ship. I'm sure the big banks took advantage of this opportunity to buy up metals too. All this did was shake out the people who can't afford to have a long term savings strategy, ie., the middle class.

We still have the highest GDP in world.

That makes the dollar still the prettiest girl at the dance.

The GDP which is a stupid measure....

...as it includes our debt...a good chunk of which we shouldn't even have to pay because it is from the banksters gambling on their consolidated debt obligations etc.

I agree

but in this weird world we live in perception is still reality.

More like...

the best looking horse in the glue factory.

The Virtual Conspiracy

I see it as deleveraging

Investors are liquidating assets. When the crisis comes there will be a frenzy into the dollar. It will be euphoric. Weather it! Buy and take advantage because on the other side is huge up turns.

BTW, I heard Kodak and and another company tapped into a line of credit signally cash flow problems....

For Freedom!
The World is my country, all mankind is my brethren, to do good is my religion.

Capt. Corona gave right answer....

we would just add that the dollar floats in respect to the Euro and other currencies, and that has a small effect as well, not to mention the 'paper silver' out there.

"Hence, naturally enough, my symbol for Hell is something like the bureaucracy of a police state or the office of a thoroughly nasty business concern." ~~C.S. Lewis
Love won! Deliverance from Tyranny is on the way! Col. 2:13-15

2 reasons...

1. The Crimex... I mean Comex raised the margins on all metal accounts forcing a sell off. Leveraged Silver is now 26% up from 10%.

2. During the 700 pt crash last week, people needed Dollars to cover their positions forcing selling in all liquid assets. Most people sell where they have profits rather than take loses on the dogs in their portfolio. What is about the only thing up this year? You guessed it, Gold and silver.

Relax, we will get it all back and more. From my point of view this is a buying opportunity. As we say on www.zerohedge.com BTFDs'! (Buy the Freaking Dips)

Go long Gold, Silver and Lead...Go Short US Dollar. Remember when a candy bar cost a nickel? I don't either but why is it smaller and a $1.25 now?

Who saves in a constantly devaluing currency?

spot on Thank you for that!

spot on Thank you for that!

Populationcurrency's picture

It is for 1 reason

FEAR of collapse.

for this situation Europe ws seen on the verge of collapse said to be more severe than the 2008 american banking failure. this time its countries that are about to fail which is much more severe.

over the last ten days greece was about to default but it never happen it just scraped in its interest repayment. but the investment world knows greece is going to eventually default.

As fear kicked in people want to hold cash as cash is king during a collapse. you get richer if you hold american cash. every other asset class is horse menure by comparison so everyone dives into cash holdings to make a profit. the only profit available in a deflationary senario.

cash in your own country is good to hold but the best currency is the reserve currency of the world which is the US dollar. if the reserve were gold gold would go up. if it was silver silver would go up. if dog turd where the reserve it would ahh nah forget that one. but what ever the reserve is is what will be the safest investment during a collapse and thus goes up and makes its holders richer. once the dust settles you shift back out of the US dollar its becomes a crap investment again.


President's working group on financial markets

remember when RP asked john mccain about the president's working group on financial markets in 2008 and exposed his ignorance? its the treasury secretary, fed chairman, sec chairman and cftc chairman working together to intervene in markets, with an unlimited credit card courtesy of the fed, to buy and prop up whatever they feel like.
"the term was used to express the opinion that the Working Group was being used to prop up the markets during downturns"
"Former Federal Reserve Board member Robert Heller, in the Wall Street Journal, opined that "Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.""
"created by Executive Order 12631,[1] signed on March 18, 1988 by United States President Ronald Reagan.
The Group was established... to give recommendations for legislative and private sector solutions for "enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence""

Simple Reasons

The reasons for gold's collapse and the Dollar rally are simple.

1. The Fed did not embark on QE3 as expected by those hedging themselves with gold. Operation "Twist" is not printing of money, just juggling of assets. This is essentially a tightening of monetary policy compared to QE2. Tighter monetary policy usually leads to a lower price for gold.

2. The global stock market sell off forced a lot of hedge funds to pay redemptions to clients pulling their money out. When this happens, your "winners" (gold/silver in this case) have to be sold to fund these redemptions. Leveraged paper purchased in the metal market makes this snap back violent.

3. China appears to be cooling off and the Chinese "miracle" may hit a brick wall. Since a lot of gold demand comes from Asia, it's obvious the commodity complex cannot hold up under such pressure. The theory of decoupling has once again been proven wrong. Every major economy is dependent on the health of the others.

4. Bullish sentiment reached unhealthy levels in August on gold/silver. When everybody's on one side of a trade, US dollar weak, gold strong, a reversal is inevitable. Weak longs get shaken out of the market, then gold can continue to rise in an orderly fashion like it has for the last 10 years.

5. Europe is a basket case. There is no market as deep and liquid as the US Dollar. More problems for Europe means the Dollar looks much more appetizing, especially to European Banks that are having difficult getting access to dollars. The Fed has opened swap lines with Europe's banks and propped them up, but there's a hell of a lot of leverage in the European banking system, much more than the US banking system.

Having said all that though, the long term trend is still up. Gold is up on the year, silver may have crashed, but it was less than $20 not long ago. So some perspective is necessary.

But silver is not poor man's gold, it is not a hedge against the EURO collapsing, and it doesn't help that silver is an industrial metal tied to the health of the world economy. Gold is a monetary metal, silver is not. Stick with gold if you want to hedge your US dollar position. Silver carries much more risk and volatility.

Beware the lessons of 2008. Gold can go down and will likely do so if the market collapses. Hyperinflation may be the end result of all the shenanigans and money printing, but it is no doubt a bumpy road full of twists and turns along the way.

Do not underestimate the short term risk of deflating assets, incomes, and prices. When people are out of work and don't have money and can't or won't borrow it to buy things, prices tend to fall leading to deflationary pressure. And do not ignore the problems in the rest of the world.

And last but not least, if you price gold in US dollars it's down over the past 30 days, but it's up in several world currencies, like the Brazilian Real. The US Dollar Index is an imprecise measurement of currency volatility worldwide. It is too highly weighted against the Euro. If you still own gold, hold on to it. If you're thinking about buying, wait for it to resume the uptrend.

I hope this helps somebody.

re : Simple Reasons = Helpful.

Surely it helped understanding, and also your second post below.
We are living in a world of complexities, those who observe, research, analyze and then comment on the same - are a great help to others who lack the abilities. Your post aided our understanding of the economic conditions. Many thanks.

I agree, and I worry

That the paper bugs in gov't may confiscate gold at some point, so I think it is important to hedge that possibility with silver.

Why then is Peter Schiff so bullish on Europe?

His whole Investment business (Euro-Pacific) is based on the premise that Foreign Economies are better, and sounder than the U.S. Economy.

Is Peter Schiff wrong (Euro-Pacific must be getting a beating) -?

I like Peter Schiff, but he

I like Peter Schiff, but he is often wrong. He's a big believer in the theory of Decoupling, which has been proven wrong in 2008 and is being proven wrong once again in 2011-12. Europe is doomed, and by extension, China is also doomed. Read Zerohedge.com for much more information about how doomed Europe is. Peter Schiff has blinders on with regard to the problems in other countries and the potential for deflation in the short term. I have no idea why he would invest in Europe right now. Even if he's right, it's way too risky.

Strangely enough, the US Dollar could be the last fiat standing in a full scale world economic collapse, even though we are the greatest debtor in the world. China may be the producer, but they are still largely a developing nation dependent on Europe and the US. So I am not surprised to see the Dollar going up against many currencies, especially against the Brazilian Real and the South African Dollar.

I think the USD will ultimately fall as well though. Deflation erodes the foundations that a monetary system like ours is built on, which is debt and faith. It is therefore the pathway to the hyperinflationary loss of confidence in the entire system, in my humble opinion. I could be wrong, but I fear the current generation will have scars from this crisis for the rest of their lives, far surpassing the Great Depression. Decades of misallocation of capital and Federal Reserve manipulation have brought us to this sad result.

It will be interesting to see if some country comes from

way out in left field and moves to a gold standard, creating a game changing affect on where the currency wars end up...

dollar up

because the price of cotton has risen from a shortage of cotton due to increased sales to a certain purchaser imo.



many cotton crops got damaged in hurricanes and flooding this year too.

"There are none so blind as those who will not see. The most deluded people are those who choose to ignore what they already know." -John Heywood 1546
Dr. Ron Paul is my HERO!