Et Tu Goldman

Goldman Capitulation on Dollar Shows Reversal on U.S. (Update2)

March 29 (Bloomberg) -- The strengthening U.S. economy, subdued inflation and rising stock prices are propelling the dollar rally into its fifth month as traders seek refuge from Europe’s fiscal crisis and Japanese deflation.

Goldman Sachs Group Inc. and Citigroup Inc. ended bets on a falling dollar last week after the trades lost 2.8 percent. Strategists are raising greenback forecasts at the fastest pace since last March, just before U.S. stimulus efforts that poured as much as $12.8 trillion into the economy ended the currency’s strongest rally in 28 years. Median predictions for the dollar against 47 currencies tracked in Bloomberg surveys rose an average of 1.4 percentage points in the month to March 24.

A year after correctly predicting the currency’s decline and likening it to the fall of Rome, Royal Bank of Scotland Group Plc’s Alan Ruskin said it may soar 22 percent to $1.10 per euro if Greece defaults.

“We’ve moved away from the worst fears,” said Ruskin, the head of currency strategy for RBS Capital Markets in Stamford, Connecticut. “In the U.S., the economy picked itself up off the ground,” he said in an interview. “Compared to what it might have looked like from the view of March 2009, March 2010 looks very good.”

The rally has been fueled by Greece’s debt-and-deficit crisis, which sparked speculation the euro region would suffer its first default or dissolve. Forecasters are trying to catch up with the euro’s decline. The median euro prediction has it at $1.36 by the end of the year, down from an estimate of $1.48 in December.

The Fed’s printing of dollars last year prompted Royal Bank of Scotland to predict in June the euro would appreciate to $1.40 by the end of 2009.

“The psychological impact should not be underestimated,” Ruskin wrote last March of the central bank’s quantitative- easing program. “This is an historic moment -- the start of debasement of the world’s reserve currency -- and it feels to many participants that in the grand sweep of history we are witnessing the end of ‘Rome’ on the Potomac.” 


As we have mentioned in several previous posts, the US dollar climbing is a natural outcome of a deflationary environment. Since it is still the world's reserve currency, when financial troubles arise, the US dollar rises. Since the Euro is the only other serious contender for reserve currency, and it shows repeated signs of failure thanks to unrestrained borrowing by the PIIGS, it is only natural for money to flow back to the greenback.

What is also interesting to observe is the bond market's reaction to the increasing size of the US debt.
Since the bond market is our early warning indicator, we view it with increasing interest.
Rising yields that we noticed a few sessions ago are the first signal.

We need to ask ourselves, how long will the bond vigilante's allow the US to borrow with relative impunity before rates skyrocket and bond prices collapse?

And, what will that do to stock prices in the event a full deflationary collapse unfolds?

Looks like Goldman might miss the call on stocks too.


  1. I doubt the FED and the US Government will do the right thing. In the end, they will take the easy way out and monetize the debt (As all other governments have done in history.)

    The S & P 500 will soar in dollar value, but will crash in the S&P 500/loaf of bread ratio.

  2. So the strengthening of the US$ is because it is the shiniest of all turds?


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