Profile Website
Recent Articles ¬
Listing of Articles >>

Printer Friendly

It's Over
November 19, 2004

While the US dollar has already declined 35% against the euro in the past four years, the main event has not yet occurred. The euro was just the opening act.

Correcting the US trade deficit requires the dollar to weaken against the currencies of those countries with which the US has the largest trade deficits, meaning the Chinese renminbi and the Japanese yen.

The Bank of Japan sold 14.83 trillion yen in the first two months of this year, and bought roughly 140 billion dollars to keep the dollar from falling below 105 yen. But in March they called it quits. Since March Japan has been noticeably less determined to support the dollar and, guess what, the dollar has declined by 7% against the yen since then.

In September Japan actually reduced its Treasury position by 1.5 billion dollars. It was the fist time in two years that Japan sold more US Treasuries than it bought.

I’ve often been asked how long I thought Japan and China would continue to support the dollar. Well, it seems that we now know the answer: until March 2004. With Japanese support for the dollar waning, it won’t be long before China lets the renminbi float and other South East Asian countries start concerning themselves with issues other than competitive devaluations against the dollar.

For a while now the US has been pressuring China to let its currency float, a move that is widely anticipated to lead to a stronger renminbi against the dollar. This must rank as one of the dumbest things I have seen the US do in recent times.

Calling for a stronger renminbi is, by definition, calling for a weaker US dollar. However, US Treasury Secretary John Snow said in London, just this week, that “Nobody has ever devalued their way to prosperity.” I guess the US Administration feels that the US is already so prosperous that it could afford to pursue a weaker dollar, even though its official policy is one of a strong dollar. If that sentence confuses you, don’t worry, it seems to confuse John Snow as well.

While the fixed exchange rate between the dollar and the renminbi has allowed Chinese exports to remain very competitive in US markets, it cost the Chinese dearly. China has had to buy in the order of 500 billion dollars’ worth of US Treasuries to keep the renminbi pegged to the dollar. This year alone China bought in excess of 100 billion dollars. At the same time, the falling dollar has caused the price of Chinese raw material imports to soar. Just in the last year the cost of oil is up 33%, copper is up 55% and nickel is up 18% -- you get the picture. If China allows the renminbi to float, and it appreciates against the dollar as is widely expected, then the cost of raw materials imports to China will drop significantly and that is most certainly positive for the Chinese economy.

China alone will not be able to support the US dollar. With Japan clearly indicating that it is getting indigestion from an overdose of US Treasuries it would imply that China has to take up the slack if the dollar is to remain at its current exchange rate.

Given that China is under pressure from the US to let its currency float, and appreciate against the dollar, this would be an opportune time for the Dragon to politely grant the US its wish. But if the Chinese let the renminbi float it also implies that they would not have to buy as many US Treasuries going forward.

Japan has reduced its Treasury purchases since March and I wonder if our intrepid leaders in Washington have thought about who will finance the growing US budget deficit. Life has been far too easy for US politicians in the past fifteen years. Just like US consumers, they have become proficient at spending in excess of their means, in the belief that there will always be someone out there to lend them more money.

But the game is over. With the US economy sinking into quicksand the buyers of last resort have been the Asians, and now it seems that they have had enough.

According to The Conference Board Inc., a private economic research group, the outlook for the US economy further weakened in September. This is the fifth straight decline in economic leading indicators. With such a bleak outlook for the US economy it’s going to be tough to replace decreased Chinese and Japanese appetite for US bonds with private purchases.

For most of this year I have been saying that we need to see the US dollar decline in conjunction with rising interest rates before the dollar-gold price will sustain a meaningful rally.

Since the day after George Bush was re-elected as president of the United States interest rates have risen and the dollar has declined. It’s too soon to call it a trend, but my own feeling is that the dollar is heading much lower and the gold price is heading much higher.

The US trade deficit is a virtual guarantee that the dollar will fall and the budget deficit is a guarantee that interest rates will rise. It’s busy happening, and there is no end in sight.

Prepare yourself, buckle up, and hold on.


Paul van Eeden

PS I’ll be in San Francisco next weekend, November 28th and 29th, for the last investment conference of the year. Given the recent gold price activity it’s shaping up to be a great conference. For more information please visit and don’t forget to register for my workshop if you’re going to attend. Registration for the workshop can be done at Just check the box right above the “Submit Registration” button.

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website ( or contact his publisher at (800) 528-0559 or (602) 252-4477.


This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.

Your Feedback.
You will stay on this page after you press "submit"