Monday, June 15, 2009

The Latest Coordinated Effort to Prop Up the Buck

By Chuck Butler Well, the Russian Finance Minister, Kudrin, definitely threw a cat among the pigeons yesterday.

Yesterday, Alexei Kudrin announced that Russia has confidence in the U.S. dollar. Specifically he said the dollar’s in “good shape,” which is a complete turnaround from Russia’s former position on the dollar.

The markets have reacted violently to this statement, sending the dollar much higher, and most foreign currencies much lower. An overreaction? I think so! But these are the types of unpredictable things that sometimes happen in the currency markets.

As far as I’m concerned, this just creates an opportunity to buy foreign currencies at cheaper levels if you’re a long-term currency investor. But it also makes you wonder what’s really going on here…

A Good Old-Fashioned Dollar Intervention

To me, this all sounds like, looks like, and smells like, a coordinated effort to prop up the buck. There are a few nations that have a lot to lose should the dollar continue on its downward path of the last three months. They’re trying to put a lid on their losses. Makes sense…

But you have to wonder what Kudrin’s real motivation is here. In the past few weeks, China, Russia, and Japan, have ALL stated that “the dollar is fine, and there’s no substitute reserve currency.” These statements all gave the dollar a boost, but it also told dollar bulls that these countries are not going to back away from dollars and dollar denominated assets right now.

However, there’s a BRIC meeting coming up soon with Brazil, Russia, India and China. And while the Finance Ministers of these countries are at the meeting, I seriously doubt that they have the same love for the dollar. But I’m guessing they will keep their dollar thoughts to themselves, because they don’t want to send the dollar spiraling downward (at least not right now).

Think about it: These BRIC nations had it all going for them until July of last year. Their currencies were flying high as the dollar continued to sink. But then they all basically crashed from last July up to March of this year.

I have to think that the Finance Ministers of these countries would be interested in knowing how they can avoid another downward spiral in their currencies. This would be the key, folks.

I don’t know what it would be, but if they did something like a currency swap / foreign exchange line between each other for trade, that would be colossal for these currencies.

G-8 NOT Focusing on Currencies for Once…Except the Euro

Meanwhile, the G-8 meeting this past weekend was centered on an “exit strategy” for the countries that have implemented the various forms of stimulus.

However, one currency item came out of the meeting… German Finance Minister Steinbrück said he had, “no problem with the level of the euro.” Now that comment alone should have underpinned the euro coming into Monday’s trading this morning. But again, Kudrin has really taken control of the markets’ mindset today.

So as we lead off the third week of June, we have not only the currencies but, commodities and stocks all in the red from the Kudrin words.

Speaking of commodities… Gold just hit a three-week low. The shiny metal just endured three weeks of battering by China, Japan, and now Russia regarding the reduced need for an alternative to the dollar.

Personally, I wouldn’t think too much of this downward move. It’s all noise at this point that’s pushing gold a bit lower. Soon the Kudrin words will be a thing of the past, and fundamentals will start governing both currencies and commodities once again. (And the fundamentals say that gold should be higher.)

But all this noise does give you the opportunity to grab gold at these lower levels.