The Dollar Is Set to Bear the Brunt of Katrina Bill
Following the devastation of New Orleans, the huge reconstruction costs, which at this stage are probably under-estimated at $200bn, will not be financed from increased taxes. Instead, said George Bush, other government spending will have to be cut.
More likely, we expect, the already huge US national debt, standing at $7.947 trillion ($7,947,000,000,000), increasing at $1.54bn per day, will grow by another big lump as the US government resorts to borrowing because deficit spending comes naturally to them. The eventual outcome will be more foreign-owned US bonds. What extraordinary change in the long-term fundamentals could generate support for the dollar? We can’t think of one, nor do we think can George Bush or Alan Greenspan!
The technicals and the fundamentals are in unison. The dollar’s direction downwards is set in stone of the hardest kind. However, markets don’t travel in straight lines and for periods of time dollar sentiment will improve and there will be intermittent rallies that have been the order of the day since the start of the US dollars decline in January 2002.
Since unpegging, the Chinese renminbi has very modestly increased in value versus the dollar. The process is in its early stages but over time, is bound to accelerate. The currencies that should benefit the most from ongoing dollar weakness include the euro, the yen, the renminbi, most commodity currencies, such as the Australian dollar, and above all else, the ultimate currency, the only one situated outside of the disreputable, eventually to be disgraced, fiat system – gold.
By R H Asset Management, in the Onassis newsletter, a fortnightly newsletter that gives insight into the investment markets For more from RHAM, visit http://www.rhasset.co.uk/
