Dollar Gets New Year Mark Down

If the first trading week of the new year is a sign of things to come, 2006 may finally reunite Americans with economic reality. Behind a smoke screen of optimistic market forecasts, upbeat predictions of continued prosperity, and rising stock prices, lies an economy teetering on the brink of disaster.

Currency traders decided to ring in 2006 by selling those dollars foolishly accumulated in 2005. In the first week of the year the dollar lost about 3% of its value. Against gold, the ultimate barometer of purchasing power, the dollar lost over 4% of its value. Even worse, in terms of a barrel of crude oil, the dollar lost more then 5% of its value.

The Dow's 2% gain on the week and its rise to a four and a half year high, cheered by Wall Street strategists, paled in comparison to the near 10% gain recorded by the Philadelphia Gold and Silver Index, which rose to a ten year high. The index, which gained over 30% last year, is now up 40% in the last 53 weeks, 350% above its 2000 low. Talk about a stealth bull market. I wonder when the public will finally wake up to reality.

The release earlier in the week of the Federal Reserve minutes, which suggested that the end to the current tightening cycle is near, added to the dollar's woes. Weaker than expected economic data, such as Tuesday's ISM manufacturing index and today's non-farm payroll data, dealt another body blow to the staggering greenback.

However, not only are rate speculations premature, they are likely inaccurate. The main problem is that U.S. interest rates are not determined by the Fed, but by foreign savers and central bankers. In a savings short, debt ridden economy, the lenders call the tune, and Ben Bernanke and company will have no choice but to march to the beat. Stepping out of time could turn the current dollar selling into an all-out run, sending consumer prices, gold and long-term interest rates soaring.

At this point, fundamental, technical, and sentimental indicators all paint a bleak picture for the U.S. dollar, and by extension America's bubble economy. Ironically, the dollar's bear market rally of 2005 only worsened its long-term outlook, and will hasten its near-term decline. Those who helped sow the winds of that rally had better brace themselves for what could well be "the mother of all whirlwinds. "

January 6, 2006

Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
www.europac.net