A dollar crash in 2010 will probably occur based on a few key triggers.
Triggers for a dollar crash can come from internal decisions made by the U.S. political machine and the reactions these political decisions have on U.S. creditors such as China, Russia, Japan, etc.. As with all currencies worldwide, the U.S. Federal Reserve Note (FRN) or dollar, has nothing but government edict supporting it. There is no conversion requirement for the U.S. currency. This fact has historically lead to a currency crises at some point. For example, the Weimar Republic, the Argentinian Peso, the British pound, etc. were all fiat currencies that crashed when large government debts strained the credibility of the currency's value.
The dollar currency crises could also come from external factors outside of the direct control of the U.S. political machine such as Sovereign Wealth Funds (SWF) from China, Russia, and other countries trading their $2 trillion plus in dollars for other currencies, or commodity plays.
When Will the Dollar Crash?
While an exact date for when the dollar will crash is hard to pin down, there are potential crisis points that are definite. Looking at the internal political decisions that the U.S. congress and all presidential administrations, especially the Obama administration, can highlight the crisis points for the U.S. dollar.
Dollar Crash Crisis Points
So many laws and regulations passed by from both Democrat and Republican parties in congress have hurt the value of the U.S. dollar, one could wonder if more expensive legislation will really matter. According to Andrew Busch of BMO Global on CNBC, "the Chinese grilled OMB director Peter Orzag on the impact that the health care bill would have on the US fiscal position." The Chinese essentially control the value of the U.S. dollar because they hold over $1.5 T in dollars and treasuries plus they peg their currency to the dollar.
The potential crisis for the dollar looms with each piece of potential legislation in the following areas:
- Health Care bill - additional tax burdens across the board.
- Cap and Trade - increases all energy costs for every part of society.
- Protectionist legislation - i.e. increase import duties on tires from China.
- Tax increases - i.e. expiration of Bush tax cuts in 2011.
- Regulatory burden - i.e. farm licensing, mining, health care rules, etc.
- Wars or increased military presence or increased tensions with Iran, Pakistan, or N. Korea.
Virtually any legislation that increases the roll of any government, will tend to drain the life from the free market, and drain the worth of the U.S. dollar, not to mention the wealth of the U.S.
A dollar crash has already occurred for those paying attention. According to investopedia.com, a 20% drop in the value of either a stock or financial holding over a period of time is considered a crash. The U.S. dollar already crashed from 120 on the USDX down to its' current level of 75. This 45 point drop, or roughly 33% drop over several years, meets the definition of a crash.
The average American now pays over $2.62 per gallon of gas (Source: www.eia.doe.gov) in large part because the dollar is worth 30% less than when gas was priced at $1.35.
Tracking the legislation that will push the value of the U.S. economy lower, revealed as a lower currency, can help a sophisticated trader in forex, commodities, gold or silver, make potentially profitable trades. As the Health care bill moves through the senate, forex traders will keep alert as to the potential for it passing. If it does pass, then the U.S. dollar will in all likelihood show the harm that this bill will inflict on the economy, the competitive position of the U.S., and regulatory burden forced on companies. The dollar will quite possibly begin to crash - hard.
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