Bitcoin thrives on dollar weakness

As bitcoin has recovered some of its JPM chief Jamie Dimon/China crackdown attack of last week, it awaits the next onslaught.

Trading roughly a $1,000 off its almost $5,000 high earlier this month the cryptocurrency has better resolve than other currencies including the US dollar.

The dollar has lost roughly 10% of its value against other currency this year. Trading near a high of 94 on the WSJ dollar index, today it stands at 85.3. The chart is one long slope down with no peaks since January.

Funny how this metric never comes up in Federal Reserve meeting or discussions. Cheapen the dollar to spur growth is not a sound basis to build a recovery. But Wednesday when the Fed announces its rate decision, we will not hear anything about the dollar’s worth vs. world currencies.

So how much of the roughly $3,000 price gain in 2017 can be attributed to dollar weakness? I would say it can take credit for almost half the gains as more sophisticated investors sought a hedge against a depreciating dollar. Especially the Chinese, which have their yuan pegged to the dollar.

Look for bitcoin to rise further after the Fed holds rates on Wednesday. This will give you more of an indication of who is using bitcoin as a hedge.

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IMF eyeing blockchain for roll out of SDR to replace US dollar: Rickards

I was talking to a currency trader, Thursday on the train going home. He knows I’m a business editor at a large paper in New York City.

He was telling me how Fx traders were not taking any positions after the end of this year. How the markets were constricting and said it was a huge problem and perhaps a bigger story.

I asked why? Was there a global currency coming or perhaps a reset?

All he could tell me as we got off the train was that I should look into it.

I researched over the weekend, and could not come up with anything. Now admittedly, I don’t usually look that deep into the currency trading world. It’s a closed community that’s not very transparent or accessible.

However this morning I did see that James Rickards, author of “Currency War,” among other titles and cited here before, put out an open letter to President Trump warning him of problems in the US dollar.

The nutshell of the letter is that beginning Jan. 2018 the International Monetary Fund — using blockchain technology, which is the same technology that bitcoin and other cryptocurrencies use, will be issuing Special Drawing Rights (SDR) as a new world currency to replace the dollar.

Now I find his letter highly doubtful given the quick timing of implementation, however I have this currency trader from Deutsche Bank telling me there are problems in the Fx markets, prior to the paper being published.

So I have two sources essentially saying the same thing.

Rickards does cite white papers and statements from IMF chief Christine Lagarde talking about SDRs and certainly Rickards has a long history of talking up the SDR as a world currency, replacing the dollar.

So what does this mean in the big picture? Rickards writes:

Just look what happened the last time we had a big change in our global financial system. In 1971, Nixon announced the U.S. would no longer officially trade dollars for gold. That created a lot of uncertainties, turning that decade into a nightmare for stock investors.

 

Take a look… the Dow Jones, an index of “stable” blue chip stocks (the kind most retirees like to hold), was cut in half. Stock investors bailed out of the market and, for the most part, didn’t come back for a decade.

 

I expect something similar once Distributed Ledgers go live.

The transition from a U.S. dollar system to a new system dominated by SDRs will be messy. Stocks will collapse… and will stay down.

 

There will be no recovery this time, because the U.S. government won’t be able to come to the rescue like they did in 2008.

 

You [President Trump] won’t even have funding for normal operations, let alone enough funds to save stock investors.

 

There has been a plenty of selling of the dollar recently, but that’s against other currencies like the euro and pound, If the IMF’s plan is true those currencies would also be devalued, so that is not a good indication of the plan.

Unless you figure in a currency trading scenario where the 800-lbs gorilla is the dollar and it is weakened, then all other currencies in the world will gain.

If crude can be traded in any currency, then there is big trouble in not only the currency market — a small backwater trading operation — but Treasury trading will implode.

That’s where Rickard’s nightmare scenario comes to fruition.


9-11-01: Never Forget

Bitcoin's rise being Fed by Yellen

US security markets took the release of the Fed minutes in stride on Wednesday as most analysis said March was on the table for a rate hike.

Investors seem to take that in stride since Fed chief Janet Yellen has been using this script for some time and as I wrote yesterday there will not be any March madness in Fed rate complex.

However that does not mean the “currency” markets were unchanged. Bitcoin, the crypto digital-currency moved from $1,078 to $1,137 over the two-day trading period. That’s a 6 percent move on the words of the Fed, which tells me no Fed hike in March and the bitcoin move is a hedge against a weakening dollar. [Editor’s note: Bitcoin is now trading $1160 on Thursday]

As I have said many times, I use bitcoin as a canary in the coal mine, since its adoption is widely used as a hedge for devaluation in currency markets by large financial institutions.

Bitcoin is no longer a dark web currency for nefarious activities. The Securities and Exchange Commission is about to approve a bitcoin ETF administered by the Winklevoss twins of Facebook fame.

Keep an eye on bitcoin’s moves over the next three weeks for a good barometer of what the sentiment is for the March Federal Reserve meeting.

The Battle of the Dollar has commenced

The Battle of the dollar has commenced.

The forces battling to squash the value of the greenback stretch from Washington to Beijing, with battle lines in Tokyo, London and Shanghai.

A strong dollar is crippling to the Chinese economy, since the yuan is pegged to the dollar and has already been devalued by 10% to keep prices in China from exploding.

The Trump Administration — despite not having Treasury-designate Steve Mnuchin’s Senate vote yet — still has spoke about the need for a weaker dollar to keep their pledge of improving trade exports and creating more jobs here. A strong dollar increases costs for salaries here in the US and raises the costs overseas of American-made products.

The collateral damage in this battle will be the stock market as equities fall on cheaper dollar. A cheaper dollar is inflationary and stocks despise inflation, but its a daily fight so trading will be choppy. I wrote about this earlier this month.

The question is who is on the other side of this trade battling central bankers and their deep pockets?

China and Russia are certainly defending their currencies in the global forex and bond markets. The complicated trades involving US sovereign debt has deep effects in currencies.

Selling Treasuries can cheapen the dollar and the converse is true. Look at yields in the last three weeks in US sovereign, which have dropped with increased buying of the debt.

The battle will continue for most of the year, since the Federal Reserve will not be able to raise rates until Q4 as I said earlier.

Trump calls out China over strong dollar

Well, we knew it had to happen soon — just not this quick.

President-elect Donald Trump came out to beat down the strong dollar. In an interview with the Wall Street Journal, Trump called out China as a currency manipulator by only giving the yuan token support.

I have written about this since last month, when I said that the strong dollar was going to take the knees out of Trump’s plan to move jobs back to the US.

Now why should we care so much about the machinations going on in the currency trading pits?

As the value of the dollar falls 1.0% this morning — on the back of Trump’s comments — the Dow futures are down 100 points and the price of gold is up $20. Crude futures also rise on a weaker greenback.

So as I have often told you the biggest market mover is the dollar. As it has strengthened 4% since the election, equity markets have followed the same trajectory while commodities have lost ground.

The battle of the strong dollar is going to be the major meme of 2017, as central banks — struggling under massive debt by issuing bonds to create “wealth” for banks to bolster their balance sheets — cannot fight a currency war. The central bankers need a stable currency market for their inflation plan to have any chance to work.

Jim Rickards’ book “Currency Wars” can give you insight into what will unfold over 2017.