Contrary to what the dollar's staggering upturn against nearly all currencies since the beginning of July 2008 suggests, LEAP/E2020 sees no reason to modify its anticipation about the EURUSD exchange rate at the end of this year. On the contrary, the specific nature and conditions – as they are described in this 27th issue of the GEAB – of the wide-scale manipulation of the US currency index that the US Treasury Department has been operating since the last week of July 2008, with the active support of the US Federal Reserve's « Primary Dealers » and the central banks of China and most probably of Japan and Europe, have convinced our researchers that, besides the fact that it was temporary, the upturn was in fact the sign that the collapse of the dollar system we have been living in since 1945 was gaining momentum.

Since the end of July 2008, many explanations have been provided to the fantastic rebound of the US currency against all leading currencies. These explanations were often focussed on the EURUSD exchange rate, which has obviously become the barometer of the end of the dollar era. Our researchers have carefully studied all these arguments and they came to the following simple conclusion: either they had no other basis than the expectations, interests or obsessions of those who formulated them (1), or all by themselves they were not sufficient to explain such general and sudden move of the US currency.

Hereafter our team analyses two of the three explanations developed in GEAB n°27.


1st explanation: « The whole world economy is now being hit by the crisis, provoking a rush towards quality »
It is certain that the majority of the world's financial operators and investors only realised this summer that Europe, Asia and the emerging markets were also about to be hit by the crisis (« The world plunges into the heart of the global systemic crisis » was the main title of the GEAB's June edition). They had made the mistake to believe in the announcements released by those countries claiming, as always, that all was for the best... until they noticed it was the contrary.
Of course the crisis has impacted most currencies, but they are not reacting simultaneously given the very different conditions between for instance the United Kingdom, the Eurozone, Japan and Australia. But, above all, in consideration of the obvious series of bad news coming from the United States (the nationalisation of Fanny Mae and Freddy Mac for instance will increase significantly the country's already abysmal public debt), the US economy can really not be described as a “quality” safe haven, as Lehman Brothers bankruptcy has just illustrated again. As a matter of fact, as we will see in the rest of the explanation on the dollar manipulation, it is precisely for opposite reasons to « quality » that this operation was set up. In any event, the markets' taking into account a new factor would not normally generate such linear, general, lengthy and uninterrupted process. The famous “invisible hand of the market” is less heavy and determining than that.
This first argument has therefore been considered very insufficient to explain the scope of the movements taking place since the end of July, and totally irrelevant to justify the duration and linearity of the process.

US debt corrected for inflation (in year 2000 dollars) - Source: US National Debt Clock

2nd explanation: « The US went into recession before the rest of world therefore they will come out of it sooner »
Out of politeness, we prefer not to name the reputable media which, all over the world, repeated this « argument »: so much absurdity is either deliberate lying or plain stupidity. What is certain for the vast majority of financial and economic players is that the US are obviously hit by a severe recession, with their financial system imploding because of the subprime crisis and consequences (2). What is probable for most of them now, is that Europe, Asia and the rest of the world will be affected at various levels and will experience some economic slowdown (LEAP/E2020 already wrote in detail the ongoing and upcoming evolution of this process and it is not the time now to come back on that). What is certain also for the majority of investors, is that besides the UK - and Spain to a lesser extent, no major country is affected by such manyfold crisis (real estate, finance, banking, economy, currency, military…) as the US, no one having the faintest idea of how and when it will end. In fact, this “argument” is based on the idea that the crisis currently affecting the US would be less bad – or not worse, to the maximum – than the crises affecting the rest of the world, and that it would not affect the country any more and any longer than it would affect the rest of the world. Those who claim this argument would also like us to believe that all economic and financial investors massively rushed to buy US dollars and to sell their other currencies, even on those days when the Dow Jones was losing 300 points because of very bad economic news! Apparently these global investors display a rather hectic behaviour: they believe in the US dollar but they are selling all their assets tied to the US economy! They are convinced that the US economy will improve sooner that the rest but they are getting rid of their shares of this economy in order to buy US dollars! This kind of behavioural derangement has no more to do with stupidity, it is madness... unless it is a desperate « retreat forward », and in this case the upward trend is ephemeral and some very serious problems are ahead for the US dollar and US dollar-denominated assets. As we will see later on, it is precisely on this phenomenon that the manipulation played. In any event, the “argument” according to which “the US would get out of the crisis sooner than the others because they got into it before” failed to convince our team.

Impact of recent financial crises on investment banks (Dark blue: duration; Light blue: severity) - Sources: Morgan Stanley / Oliver Wyman

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Notes:

(1) In the field of currencies where speculation, history, nationalism and strategy are intermingled, obsessions are very common.

(2) Every week now, at least one bank, big or small, goes bankrupt. And the US government must assimilate whole segments of the financial economy, as in the case of Fanny Mae and Freddy Mac, and of Lehman Brothers.