The trouble started yesterday when Pimco's Bill Gross said that America's precious AAA debt rating was in trouble.
The United States will face a downgrade in "at least three to four years, if that, but the market will recognize the problems before the rating services -- just like it did today," Gross told Reuters.
That admission, while obvious, forced the markets to recognize a trend that was already several months old.
Even Treasury Secretary Geithner had to speak up about the concern and call for cutting the federal deficit.
The dollar dropped to a 4-month low against the Euro, and an 8-week low against the yen. The primary reason?
The Fed's plan to monetize more debt.
“The Fed may expand its asset-purchase program, which would increase the supply of greenbacks in the market,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This could undermine the value of the dollar and spur investors in the U.S. to put their funds overseas.”
Major players in the markets are getting nervous about all these dollars being created by the Fed.
“The main driver of dollar weakness is lack of confidence given U.S. monetary and fiscal policies,” said Montreal-based Laurent Desbois, president of Fjord Capital Inc., a currency fund manager with $800 million under management. “There’s a whole lot of liquidity.”
“The dollar’s weakness reflects growing concern about the fiscal sustainability of the policy response to the crisis,” Todd Elmer, a currency strategist at Citigroup Inc. in New York, wrote in a report today. “This provides for further dollar downside, which extends beyond the turn in the risk cycle.”
The administration of President Barack Obama will issue a record $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc.
“The decline in the dollar has developed more a life of its own this week, extending to major currencies even as U.S. equities have flattened out,” Greg Gibbs, a foreign-exchange strategist at RBS in Sydney, wrote in a research note today. “The broader thematic is that simply the U.S. was and is pursuing a relatively easy monetary policy that tends to create inflation pressure.”
“We are testing key levels on the long end of the market,” said Hicham Hajhamou, a trader in New York at BNP Paribas, one of the 16 primary dealers that trade with the Federal Reserve. “There’s a lack of confidence in dollar assets and the bond market is repricing itself.”
This is, of course, an easily predictable outcome from excessive federal deficit spending and Fed monetization. Interest rates will rise and the dollar will fall. It will lower everyone's standard of living while choking off the recovery.
Anyone who thought otherwise is naive.