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The Dollar: No Longer The Universal Tourist Currency?

Last week I heard that some stores in New York City were starting to accept payment in euros, and in some cases, the British pound. While some news outlets insinuated this was yet more proof of the dollar’s decline, I saw it more as a ploy by the stores to draw foreign shoppers by helping them avoid the hassle of converting their currency. On the website Lost Weekend: Brit Blokes On Tour, editor Rory Boland wrote the following post on February 7:

Now, stores in the Big Apple have started accepting the Euro, and in some cases the British pound, in an attempt to tempt in European bargain hunters.

The dollar, once the world’s currency, currently seems more like Monopoly money, and European shoppers have been rampaging through the city’s stores, malls and boutiques cashing in on the greenbacks tanking value.

Still, who would have thought New Yorkers would again be accepting coins and notes with the Queen beaming back at them. What would George Washington say?

Oi! Not funny!

Anyway, it’s what I read earlier this evening that really grabbed my attention and provided further evidence of the dollar’s fall from grace. Michelle Higgins of the New York Times News Service wrote “As the currency slides, U.S. dollar is no longer a ticket to anywhere,” which appeared yesterday on the Kansas City Star website. Higgins said:

The U.S. dollar used to be the universal tourist currency, accepted almost anywhere, from the streets of Hanoi, Vietnam, to the plains of Africa. But the continued slide of the dollar against other currencies has led the greenback to be shunned in unexpected places, creating new problems for American travelers and pushing prices higher.

The Taj Mahal has stopped accepting dollars for the entrance fee under a new edict from the Indian Ministry of Culture. As a result, for entrance to the Taj Mahal, Americans must now pay 750 rupees, about $19, at the rate of 39.49 rupees to the dollar, compared with $15 previously.

Some tour operators say they have encountered newfound resistance to dollars in parts of Vietnam and Peru, especially in villages that are off the beaten path.

“It used to be a $100 bill was universal everywhere, from Moscow to Mozambique,” said Peter Rudy, the North America director for KE Adventure Travel, a Denver-based outfit that books adventure trips throughout the world. “It’s not now.”

So much for going overseas in the near future. That Massachusetts Getaway Guide I received this weekend is looking pretty good right now. Anyone ever been to Rockport?

Jim Rogers: Coming Recession ‘One Of The Worst’

Commodities investor Jim Rogers told Bloomberg yesterday that the U.S. economy is heading for a recession that may be the worst “in a while,” and investors should sell the dollar as global currencies weaken. The chairman of New York-based Rogers Holdings said from Singapore that:

It’s going to be one of the worst recessions we’ve had in a while because we had so many excesses going into it… It’s going to be bad for all of us as currencies come under more and more stress and we have more inflation in the world.

In addition to sharing his views on a possible recession, the legendary investor said that the governments of the United States and United Kingdom have been “lying” about inflation. Rogers noted that he’s sold both the dollar and the pound, and said:

I hope by the end of this year all of my assets will be out of the U.S. dollar… The dollar is a currency that’s terribly flawed and it’s going to be under duress for many years to come.

The co-founder of the Quantum Fund with billionaire George Soros in the 1970s re-iterated his belief that the commodities bull still has a ways to run, despite the weakness of the greenback. Speaking to Reuters by telephone from his home in Singapore last Thursday, Rogers said:

I sound like a broken record, but it ain’t over yet. It’s got a long way to go… It’s come a ways, but we may be in the fourth inning of a nine-inning ball game, to speak in U.S. baseball terms.

Commodities prices are going to go up no matter what happens to the U.S. dollar, even if it rises, because there are serious supply/demand shortages which have developed over the past 25 to 30 years.

Commodities: still swinging away

In addition, the American investor noted:

I am still short the investment banks in America, and these are the guys (Federal Reserve Chairman) Bernanke’s trying to save. I think that’s been the single area with the most excess — that and home-building.

Rogers recently moved to Singapore after selling his New York townhouse for $16 million on December 17, a gain of 150-fold from the price he paid for it, according to The Morning Call this past Sunday. The investor and author bought the property for $107,000 in 1977.

Too Much Egg Nog For The Dollar Bulls?

Earlier today, the U.S. dollar advanced the most against the euro since June 2004 after it was revealed U.S. consumer prices increased 0.8% last month after a 0.3% gain in October, and producer prices rose the fastest in 34 years in November. The rise in prices prompted traders to pare expectations for interest rate reductions, sending the greenback higher. The U.S. currency rose 1.5% versus the euro over the past five days, which was the biggest weekly increase since August. The dollar was also helped this week by a coordinated plan led by the Federal Reserve to tackle the credit crunch, and the third interest rate cut this year with the goal of avoiding a U.S. recession. The ongoing rally this week meant the dollar pared some of its losses against the euro this year, down 8.5% against the European currency to date.

An increasing number of analysts are painting a bullish picture for the U.S. dollar. Michael Malpede, a senior currency analyst in Chicago at MF Global Ltd., the world’s largest broker of exchange-traded futures and options contacts, told Bloomberg today:

The fundamental picture started to move in the dollar’s favor. Inflation is picking up, making it difficult for the Fed to aggressively cut interest rates.

Malpede predicts the U.S. currency will strengthen to $1.43 per euro by the end of the month. Against the euro, the dollar rose 1.5% to $1.4415 at 2:19 p.m. in New York, from $1.4633 yesterday, according to Bloomberg.

Toshi Honda, a London-based currency strategist at Mizuho Corporate Bank Ltd., said:

The move approaching $1.50 was too rapid, irrational. It was driven by fear of a U.S. economic meltdown, but I don’t think the fear is going to be materialized. The overall sentiment is positive for the dollar.

Honda thinks that the dollar will end the year below $1.40 against the euro. Sentiment does seem to favor a stronger greenback. According to the median forecast of 44 economists in a recent Bloomberg survey, the American currency will be at $1.45 per euro by the end of March and $1.40 by the end of next year.

There are even some who expect the dollar to put on a strong performance should the feared recession materialize. According to participants at this week’s Reuters Investment Outlook 2008 Summit in New York, a U.S. recession, coupled with evidence of global stress, could lead to flight-to-quality flows into the dollar. Robert Kowit, an international bond fund manager with Federated Investors, told Reuters:

If the U.S. goes into recession and it looks like it’s going to have a knock-on in other major economies, the dollar may actually outperform in a recessionary environment.

PIMCO’s Bill Gross added, “I think the dollar has had its run to the downside against the euro and the pound.”

What a change from a few weeks ago, when the actions of rappers and supermodels seemed to indicate the dollar was toast. Yet, some still believe the greenback is on a road to nowhere. Enter Paul Rodriguez, Senior Technical Analyst from the Economic Research Team over at London-based Lloyds TSB (formed in 1995 by the merger of Lloyds Bank and the Trustee Savings Bank). In a December 10 report, Rodriguez said:

As the year draws to a close, the interesting feature for the US dollar remains the short term strength set against potential for longer term weakness in 2008. This broad brush view of the dollar’s outlook is the inverse of the general market’s expectations which satisfies the contrary element of my strategy. It has been clear for some weeks now that the broad US dollar sell off was no longer the one way street it was claimed to be and as prospects for interest rate cuts have been fully absorbed by the market, the rebound should continue.

Yet, Rodriguez warns the dollar’s downward trend remains intact:

However, this does not mean the trend next year will be dollar positive and as sterling recovers from its oversold status, a move back towards 2.11 should see a broader appetite to sell the US currency. Whilst the yen and swiss franc lose ground against the dollar on the back of a rebound in equities, it should be noted that the dollar has fallen a long way and any interim recovery is fully consistent with a continued bear phase…

The dollar index has rebounded and whilst the broader market is broadly dollar bullish, I continue to view the recovery in the context of a long term downward trend.

In a Forbes interview yesterday, legendary investor Jim Rogers warned about the type of dollar rally we saw today:

I’m terribly pessimistic about the state of the U.S. dollar. But there are so many pessimists out there right now that we’re bound to have a rally. I doubt you can find anybody except (U.S. Treasury Secretary Hank) Paulson who is bullish on the U.S. dollars. If that rally comes, I would use that rally to sell the rest of my dollars. I’ve never seen so much pessimism in my life. So I’m a dollar bear looking for a big rally. So I can sell.

And Rogers’ latest prognosis for the greenback?

The U.S. dollar is not an asset I want to hold over the next 10, 15, 20 years. We have an idiot running the central bank right now who knows nothing about currency, history or the markets.

U.S. Budget Deficit Could Suffer ‘Noticeable Deterioration’

Today, Congressional Budget Office Director Peter Orszag told the House Budget Committee that subprime mortgage woes and other factors have combined to create an “elevated risk of a recession,” according to MarketWatch. However, Orszag emphasized that the most likely scenario was “low economic growth,” pointing to the general consensus of analysts.

His testimony was notable in that he pointed out that a recession or extended stretch of sluggish growth could cause a “noticeable deterioration” in the U.S. budget deficit. A budget deficit occurs when the U.S. government spends more money than it takes in. Orszag pointed out that the U.S. deficit has increased by around 1% to 3% of gross domestic product during recessions since 1968, or $140 billion to $420 billion in today’s economy. For fiscal year 2007 (which ended September 30), the deficit stood at $162.8 billion, according to U.S. Treasury data.

Source: White House

On December 3, Bloomberg said a growing number of strategists are saying the stage is being set for a U.S. dollar rally in 2008. They have been pinning their hopes on the simultaneous narrowing of the U.S. budget and trade deficits for the first time since 1995. Stephen Jen, the London-based head of currency research at Morgan Stanley, told Bloomberg, “I am confident that the dollar will have a significant rally next year, especially against the euro and the pound… The deficits are shrinking fast.”

For how much longer?

Gold: Barbarous Relic Or Investment Superstar? Part 2

In part one of a three-part series on gold, I noted that the price of the metal has risen significantly in the past year, despite all the arguments leveled against gold by its detractors. Meanwhile, the metal looks to be headed for its seventh straight annual gain. Gold bulls point to the following as having a significant impact on its price in 2007:

U.S. Dollar Weakness- The U.S. currency is down four out of the last five years, and has dropped almost 11% so far this year based on the Federal Reserve’s U.S. Trade-Weighted Major Currency Index. This autumn it’s been at its weakest against the euro since the European currency started trading in 1999, the lowest against the Canadian dollar since it was floated in 1950, and at a 26-year low versus the British pound. The end of the U.S. housing boom, the subprime mortgage crisis, and a credit crunch, in conjunction with forecasts for a slowing U.S. economy, have weighed down the U.S. currency. The increased threats from dollar diversification by countries holding large numbers of greenbacks in their foreign currency reserves, sovereign wealth funds looking to exchange their dollars for other assets, and more nations looking to decouple their currencies from the U.S. dollar have only made matters worse for the world’s reserve currency. Assuming the existence of a strategic inverse relationship between gold and the greenback, investors have poured money into the precious metal and related investment vehicles. Validating such actions have been forecasts by legendary investors such as Warren Buffett, Jim Rogers, and George Soros, who all predict that the U.S. dollar is going lower. Back on October 25, Buffett was quoted by CNBC as saying, “We are still negative on the dollar. We bought stocks in companies that are earning their money in other currencies.” On November 15, Rogers told Bloomberg that, “If you have dollars, I urge you to get out. That’s not a currency to own.” Finally, on June 2, AME Info reported that Soros said, “A slowdown in the United States will be transmitted to the rest of the world via a weaker dollar.”

Geopolitical Risk- The continuing stalemate between the West and Iran over its nuclear program, political instability in Pakistan, and Turkey’s spat with Iraq are just some of the more recent geopolitical risks that have driven the price of gold higher. The ever-present danger from Al-Qaeda should not be forgotten either. Consider the following warning from Michael Scheuer, a 22-year veteran of the Central Intelligence Agency (CIA), where for 6 years he was in charge of the search for Al-Qaeda leader Osama bin Laden. When asked by Radio Free Europe/Radio Liberty earlier this year if he expected more attacks on the United States or in the West on the scale of September 11, 2001, Scheuer’s response was:

Oh, I think greater than 9/11. I don’t think it will happen in Europe, but I do think it will happen in the United States. Bin Laden has been very clear that each of Al-Qaeda’s attacks on America will be greater than the last, and I think the only reason we haven’t seen an attack so far is that he doesn’t have that attack prepared. But when he does, he will use it. And try to get us out of the way, which of course is his main goal.

Stephen Walker, director of global mining research at RBC Capital Markets, said last week that increasing geopolitical risk, combined with combined with rising economic uncertainty, “should continue to provide incentives for investors to increase their exposure to gold as a safe haven.”

Supply and Demand- Last Friday, the Telegraph (UK) announced:

The era of ‘peak gold’ has arrived. Try as they might, miners cannot find enough ore at viable costs to replace their fast-depleting reserves, even if they dig miles into the centre of the earth.

The global mine supply of gold peaked in 2002, and has fallen every year since. Last year alone, the mine supply of gold fell 15%. Also in 2006, South Africa, the world’s single-largest gold producer, produced its lowest amount of gold since 1922 with overall output down 72% since its 1970 peak. It should be noted that no major new mine production is expected in the near-term either.

On the demand side, RBC Capital Markets noted last Wednesday that demand is rising as consumption increases in China, India, and the Middle East. On Thursday, a study by precious metals consultant GFMS Ltd. showed that global gold demand in the third quarter rose 19% year-on-year on the back of robust inflows into bullion investment funds and improved jewelry consumption. The report revealed that the increase in investment demand replaced jewelry buying as the major source of growth for the third quarter. Demand grew sharply in India, China, Turkey, and the Middle East, while it slowed in the United States.

Outside of U.S. dollar weakness, geopolitical risk, and supply/demand factors, gold bulls say that some of the drawbacks which Bloomberg’s Michael Sesit spelled out in part one are actually advantages to owning the precious metal. Critics of gold like to point out that it “doesn’t earn a return.” Michael J. Kosares, President and Founder of Centennial Precious Metals, Inc., argued in his book The ABCs of Gold Investing, that:

Those who criticize gold because it fails to offer a return do not really understand gold’s position as the fixed North Star of asset value around which all other assets rotate. Gold is a stand-alone asset. It relies on no individual or institution for value. Gold investors prefer it this way. In the ultimate sense, this is what money is and what money should be.

Another criticism directed at gold, said Sesit, is “the world’s biggest holders of gold, major central banks, aren’t overly eager to keep owning it.” If so, gold bulls ask why central banks hesitate to unload the metal. In 2006, net central bank sales amounted to just 319 tons, less than half of the 659 tons recorded in the previous year.

Love it or hate it, bulls and bears, gold is here to stay. In the final part of this series, I will talk about where this precious metal may go from here.

(Part 3 will be posted on Wednesday)