Dollar taking it on the chin?

Today I wanted to draw some attention to the currencies markets. There is some definite weakening in the dollar over the past couple of weeks. From a charts perspective, the Canadian dollar has been very strong putting in higher highs, and higher lows. The Yen is breaking out against the dollar, it is very close to a major breakout. The Euro has broken a trendline and is now pushing up against some resistance. The Pound has a messy reverse head and shoulders pattern. The Australian dollar has put in a textbook double bottome in, and is heading higher. And the New Zealand dollar is about to break out of a beautiful reverse head and shoulders pattern.

Now this blog is mainly focused on the fundumentals of our economy, but these charts are disturbing. This may just be a precurser to the to what we will be seeing later in the year, but if we keep heading in this direction, it could cause major problems with U.S. Treasuries.

What does a weak dollar do to U.S. Treasuries? I'm glad you asked!

1. A weak dollar decreases the intrinsic value of treasuries. Basically if you loaned somebody a hundred dollars when you could buy a new tire for your car with it, after the currency is weakened, you get payed back and now you can only buy a tire for you kids tricycle. Granted, U.S. Bond holders are getting paid a small yield, but it is not enough of a return to make up for the loss due to inflation. So just as the dollar deflates, debt deflates, this is why it is far better to be a borrower of money right now than a lender, providing you have a secure means of paying your debt.

2. Due to #1, holders of U.S. treasuries will look for better places to invest their money. They will sell their U.S. treasuries and seek out better investments like commodities, multinational companies, and foriegn currencies. This will cause the Bond prices to fall, just like stock prices fall. Once other bond holders, that were ignorant of the weakening dollar, realize that they are losing money on their "safe" investment, they too will liquidate their positions. And due to the 11trillion$ oversupply of debt, there is only one direction that bond prices can go, and that is down.

3. Because of the money flowing out of treasuries, those dollars will flow into other asset classes like commodities, multinationals, and foriegn currencies, causing the value of those mentioned to rise. This will put more pressure on the remaining U.S. Treasury holders to liquidate their positions, causing more pressure on the value of the bonds.

4. This will cause more and more pressure on the dollar, which will bring us full circle again.

If there is somebody that maybe has an education that could please give me a scenario where we will not have to face this kind of death spiral, I would appreciate it.

Here is another problem that is brewing, and remember, the key word is "delinquincies", being delinquint is what happens just prior to foreclosure. Did the stress tests figure in the possibility of a commercial real estate bubble popping in the form of mass foreclosures?

http://www.msnbc.msn.com/id/30701874

I have much more to say on these issues.

Please comment,

Cash21