Arab Unrest and Forex, Part II.

(Or, the US$ is no longer the Manchester United of Currencies.)

During most political and military crises over the past century there has been an (understandable) flight-to-safety in the investment world. That has meant investors and traders bidding up the prices of:
- Gold
- the US Dollar and Swiss Franc,
- US Government Short-Term Securities,
- and of course Crude Oil, for crises involving oil-producing regions globally.

Much of this equation has held true the past couple of weeks since Egyptian President Hosni Mubarak resigned on February 11, inspiring a series of market- (and world-) jolting copycat uprisings in Libya, Bahrain, Tunisia, and elsewhere.

What has differed from past crises has been, however, the continued FALL of the US Dollar versus most major currencies during this time (e.g. now about 1.38 to the Euro, versus less than 1.35 at the outset of the crisis). As several of you have commented to us since we issued our first Arab Unrest and Forex piece on February 21, in “normal” times the US Dollar usually moves in the opposite direction of Crude Oil, leaving oil relatively stable in terms of other major currencies. Oil up, Dollar down. Oil down, Dollar up. But again, that relationship typically holds true during quiet times. In crises times when there is a flight-to-safety, usually both the US Dollar and safe harbor commodities often move up together.

Why has this not happened this time? Again, we offer several possible explanations. We would welcome your comments as well.

1) It is over for the US Dollar. Without passing economic / financial judgment on the “real” strength and value of the US Dollar, from a perception perspective the US Dollar has lost its relative importance in the world, and is no longer the “Manchester United of Currencies”. It is not surprising that this has happened at around the same time that China has grown to surpass Japan as the world’s second-largest economy, and is rapidly closing in on the US. (Although in absolute terms China’s $5 trillion-a-year economic output still dwarfs the US’s $15 trillion, by several important measures China is now passing the US in total terms, such as “PPP” or Purchasing Power Parity, as pointed out by the Wall Street Journal.

2) Fears of US Military Involvement. Although it seems reluctant to get directly involved so far, the market is at least in part discounting the future (military) involvement of the US in more far-flung parts of the world. The US government budget and deficit is stretched nearly as thin as it can get, and any more meaningful action and commitment by the US military – and the costs and drag on the US budget such action would entail – are sure to lead to more US deficits, money printed by the US Treasury, and thereby more long-term weakness in the US Dollar.

Inflation has entered the system. Very simple. All the riots you see are in fact food riots. And cost of living.

Look at what the BBC has to say about UK inflation. They have serious problems already. Had an interview with a producer last week saying his feed has gone up 75% in the last couple of months, he can no longer produce at a profit. And we're still all in recession. No one can afford to pay more for food.

We're looking at 1928 here. Hyper inflationary depression. Almost unavoidable now. Dollar should be worth the same as toilet paper soon. And of course the less the dollar is worth the more dollars you need to pay for the same amount of oil. So that will keep pushing prices up.

If oil does spike to $140 again everything will grind to a halt again, just this time with inflation as an added problem, cause the west been printing money like the clappers, no way to avoid the inflation now. UK already seeing very serious inflation.

It's the 'quantitative easing' chicken that's coming home to roost.....

https://mises.org/daily/4016

Hey Cyclist. Don't (totally) agree. You're not describing US-based inflation, you're describing everywhere-based inflation. If anything, the US is better equipped to handle food shortages than most other countries (like the UK, and the BBC piece you cited), as it is has a much larger and more diversified agricultural industry (and more climates within the US allowing for more things to be grown, more arable land....). Unless you believe that US inflation will be worse than elsewhere, the US$ shouldn't go down vs. other major currencies.

And nothing new inflation-wise really changed over the past two weeks.

My point was (and is), that the usual specific reaction to a major-world-crisis hasn't happened.

Quite right,

For the first time in human history I would think we are seeing global inflation. Never before has a single currency dominated trade so much and never has a country in such dominant position printed so much money.

What the US and UK did is going to impact the entire world, just like the US bank failures impacted the property market in Dubai. As oil is quoted in dollars a dollar devaluation will automatically lead to inflation as all the resources are dollar quoted. So if the dollar loses value due to over supply the commodity prices will go higher. All of them.

Wasn't in the last two weeks, this been brewing for months. I saw a picture of a $100 watermelon in Angola last week. $100!!

All of this is the first symptoms of inflation.

Of course I could be wrong, but that's what I see. Everything now days is connected.