Wednesday, October 14, 2009

Fed Intentionally Devalued U.S. Dollar

The following is an excerpt from Why Did U.S. SDR Holdings Increase Five Fold In The Last Week Of August? by Tyler Durden, Zero Hedge

With everyone lately focused on China's foreign reserve position, analysts have forgotten that America also has an International Reserve account consisting of foreign currency positions, as well as gold reserves and equivalents. And while the total combined holdings as of the most recently reported period are a joke compared to China's $2+ trillion, the most recent number of $133.6 billion does raise red flags, particularly when one traces this number's level throughout the year.

We present a graphic representation of the US International Reserve Position over the past year:

Click graph to enlarge.

The big question mark at the end of August is when the U.S. International Reserve Position increased by almost 50%. The reason for this: a near quintupling of S.D.R. holdings on the U.S. balance sheet in the span of one week - from August 21 to August 28.

The SDR balance increased by 500% practically overnight and has stayed that way ever since.

By purchasing $40 billion in SDRs virtually overnight, what the Fed has done is to increase the value of the entire basket pro-rata, while in the process reducing the actual value of the dollar (which is a weighted constituent of the SDR basket). This was an operation to reduce the dollar's value: pure and simple. In many ways it explains why the DXY has continued its straight one way decline since the beginning of September, when many pundits assumed the market was finally going to tank on profit taking after Labor day. By performing this dollar adverse transaction, the Fed sent a loud and clear signal what the Fed was going to do going forward vis-a-vis the i) dollar and ii) its derivative, the stock market.

Chart of the Trade Weighted US dollar from 1973-2009. Click to enlarge.

And what is worse, this is not a roundabout or circuitous way of devaluing the dollar: this is head on intervention. It is one thing to print trillions of MBS and Agencies and to monetize Treasuries, where one could say Tim Geithner's claim that the U.S. is for a strong dollar, and the dollar is only weak as a function of supporting housing prices. That could potentially fly as an explanation. However, when the Fed is actively and purposefully destroying the dollar's worth via transactions such as material SDR purchases, then it truly demonstrates Geithner's statement as a bold faced lie to the American public. When will Mr. Geithner be finally taken to task for his repeated fabrications of reality and intent?

For Those About to Rock We Salute You

Last but not least, the US was of course expected to bear the brunt of this reallocation, responsible for purchasing three times as much (SDR30 billion) as the second largest quota allocated country: Japan (SDR11 billion). China is far in the distance at SDR 6 billion. In essence: the monetary community increased its global liquidity position, by assuming that the U.S. is still the defacto reserve currency, and forcing it to take the majority of the devaluation hit relative to all other IMF constituents.

Well done, Ben.

~ ~ ~

Update via The Market Ticker:

Now I may be missing something here but Treasury doesn't appear to have that power without an explicit act of Congress. To wit, The US Constitution Article I, Section 7 provides:

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

CONGRESS has sole authority to approve (or not) the acquisition and disposal of SDRs, which are nothing more or less than a foreign currency - in this case, one comprised of a basket of other currencies. The Executive has no power to engage in this sort of transaction on its own initiative.

But it did, and thought it wouldn't be noticed.

Well, it was.

The dollar continues to rattle around at key support. If it breaks then our import-based economy will be decimated. Oil will skyrocket and so will input costs to American business. Bye-bye profits - and businesses.

Congress, Treasury and The Fed are all counting on not only you being stupid but everyone in the International Markets being stupid. That's a bad bet, and I believe the time to buckle up is close at hand. While the "can kicking" of the last six months might seem to have been a good thing at the time, and might even look good now, I suspect that when we look back on it in a year or two we will recognize it as the disaster that it in fact was.

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