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From the Nov. 21, 2004 Break Out Report

The Death of the Dollar (Yankee that is!)
by Marco den Ouden

Note: May 26, 2007: Although this article was written two and half years ago, the information in it remains relevant today as the US dollar continues to decline and the Canadian dollar has soared to over $0.92 US. See the afterward for some current comments.

Mark Twain once wrote, after he had seen his name in the obituary column, “The rumors of my demise have been greatly exaggerated.” And maybe predicting the death of the Yankee sawbuck is a bit premature. But without a doubt, the US dollar is one sick puppy.

On Friday Mr. Sunshine, yes I mean Alan Greenspan, finally could take it no more. The sinking of the greenback has sickened even him. And so he abandoned his cryptic ways and spoke candidly about what continued weakness in the dollar could mean.

First some background. The US dollar has become the reserve currency for many countries, particularly in Asia. Their own currency is backed by reserves of US Treasury Bills. Japan has a lot of them and has periodically stepped in to buy more in an effort to prop up the dollar. Why? Because as the Yankee greenback falls, the yen appreciates, making Japan less competitive in the American market. And China has been accumulating US dollars because it has a huge trade surplus with the United States. More Chinese goods are heading to America than the other way around. To keep competitive, the Chinese government pegged the Chinese yuan to the American dollar, meaning that as the dollar moves, so does the yuan. Buck goes down, China stays competitive. The Americans have been railing against this policy to no avail.

But other currencies, including the Canadian dollar, have soared against the greenback. Why? Well, Canada has run seven consecutive fiscal surpluses. The United States has been running deficits, the latest one a $412 billion dollar deficit for the fiscal year ended September 30th. Canada also has a current account surplus, meaning that, like China, Canada exports more than it imports. The United States has a US$600 billion trade deficit meaning it has to borrow money from abroad to fund its imports. If individuals or corporations were as profligate as the United States government, the end result would eventually be bankruptcy.

Back to Greenspan. Friday he told the European Banking Congress in Frankfurt that given the size of the US trade deficit, “a diminished appetite for adding to dollar balances must occur at some point.”

“International investors,” he added, “will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the US current account deficit and rendering it increasingly less tenable.”

In less elegant and perhaps more understandable English, the you-know-what is about to hit the fan! His remarks immediately sent the dollar down to a four year low against the yen and it also sank against the Euro, which is becoming increasingly attractive as an alternative reserve currency.

And while the US stock markets blithely continue to rise, Mr. Greenspan warned Friday that at some point, foreigners might lose interest in US dollar denominated investments, something that would send stock markets into a tailspin and interest rates soaring.

This has, in fact, already started. A headline buried deep in Friday’s Financial Post blared “Chinese dump US dollars”. The feature article told how individual Chinese are moving out of the dollar. One man who had set aside US$50,000 to educate his son in the United States told of his regrets he had not held the stronger Euro or Japanese yen. “The dollar doesn’t mean anything anymore,” said another person on line at the Bank of China waiting to unload her dollars. Some are converting US dollars into Chinese yuan despite the official peg. They don’t believe that parity can be maintained and that the yuan will inevitably rise against the greenback. “The renminbi (yuan) is the hard currency now,” shouted one man as he liquidated US$10,000 in US stocks and converted it into the Chinese currency.

It used to be that black markets in currency such as existed in the former Soviet Union sold US dollars at inflated prices to those wanting to bail out of a worthless ruble or other weak currency. Today the black market in Shanghai is selling yuan to those wanting to bail out of the dollar. This reversal of roles on the black market is possibly the most telling trouble sign of all.

In an unusually blunt statement, Mr. Greenspan noted that “Rising interest rates have been advertised for so long and in so many places that anyone who has not appropriately hedged this position by now obviously is desirous of losing money.”

Significantly, President Bush on Friday approved raising the US debt limit by US$800 billion to US$8.2 trillion.  That is not small change!

It’s Baaacckkk!!!!

Compounding the woes of the US dollar is a dragon some thought the US government had soundly slain in the 80s. Inflation! Well, it’s baaaccckkk!!!!

Last Tuesday the Producer Price Index for October was released showing US wholesale prices up 1.7% for October. This was triple the expected 0.6% and the highest inflation jump in fifteen years.

Some blame this on high oil prices and a trickle down effect on the economy, but even core inflation, which strips out volatile food and energy items, rose 0.3% in October, also three times expectations.

Wednesday the Consumer Price Index was released showing a 0.6% increase from September. The core rate was up 0.2%.

Some analysts averred that the stock market bubble of the late 90s was inflation driven, that even though traditional measures of inflation showed it to be in check, it was showing up in surging stock prices.

After the crash brought reality back to the stock market, a new bubble has formed. Real estate!

Patti Croft, chief economist for Vancouver-based Phillips, Hager and North Investment Management, sounded the alarm after a recent PH&N study showed that there were clear signs of a continent wide bubble in the US housing market. A bubble, incidentally, not evident in the Canadian market.  US housing prices are rising at a pace that “we just don’t think is sustainable,” said Croft.

On top of that, US consumer debt is at record highs and many Americans have leveraged their homes to take advantage of low interest rates and high valuations. This has fuelled consumer spending in the States, helping fuel recovery. But as rates continue to rise, this bubble, like the stock market bubble, could collapse.

This would produce a double whammy effect – many debtors will face a cash flow crunch and will cut back on spending. This would create a downturn in the economy.

In fact, this has already happened in the UK and Australia where rapidly rising interest rates have cooled off house prices and in the Netherlands where a downturn in the housing sector has caused a “deep downturn” in the economy.

While the US stock market seems to have weathered the storm and is now on the rise again, the fiscal chickens are starting to come home to roost. How long this can continue until the crunch comes is anyone’s guess. But investors should be cautious on the US market. 

Everything’s Relative

Here’s a quick riddle for you. Of the TSX Composite Index, the NASDAQ, the Dow, the price of gold, the XAU and the Canadian dollar, which has gained the most this year? The last two years?  The last three years? The last four years? The last five years? The answers are in the table below.

Index Comparisons as of Nov. 12, 2004















2 Years







3 Years







4 Years







5 Years







What’s interesting here is that while the US markets are often considered by Canadian investors as the place to make substantial gains, the TSX Composite Index has outperformed both the Dow and the  NASDAQ for the one year, three year and five year terms. In fact, over five years, the TSX is up 18.21% while the Dow and the NASDAQ are both still in the red with the NASDAQ down over 30% for both the four year and five year terms.  And a recent report showed that if you strip out that dog named Nortel from the TSX Index, it is now hitting all-time new highs.

The big winner has been the XAU which, although still in losing territory for the year-to-date as of Nov. 12th, has outperformed every other metric in all other time frames noted above.

But wait!!! The above is misleading. Why? Because each is calculated on its own terms. The TSX is valued in Canadian dollars and its change is relative to itself. For US investors who put their money in the TSX, their gains are magnified by the gain in the Canadian dollar. For Canadian investors who put their money in the US market, their gains are diminished and their losses magnified by the currency differential.

And even the fantastic gains made by the price of gold and the XAU are diminished as a result of the currency differential as both are traded in US dollars. The implications for Canadian investors are significant as the US dollar continues to slide.

One of the important implications for Canadian stocks is that companies who export heavily to the US market will face a price squeeze. They’ll either have to lower prices or lose export business. This could significantly affect the bottom line and the stock price.

One of the huge factors in the booming Canadian economy are the resource industries. Oil companies and gold mining companies are obvious examples. Both commodities are priced in US dollars. And while the jump in oil and gold prices has been good for these companies, to the extent that their operations are in Canada or in countries whose currency is appreciating relative to the US dollar, these gains will be mitigated. For net gains to be made, the commodity prices must increase faster than the US dollar is sinking.

Since we publish in Canada, the table below shows our first table recalculated in Canadian dollars.

Index Comparisons in Canadian Dollar Terms as of Nov. 12, 2004







US $








2 Years







3 Years







4 Years







5 Years







To create the table we simply converted all US dollar figures to Canadian dollars before calculating changes. For example, the US dollar was worth $1.5742 Canadian on Nov. 12, 2002. The Dow was at 8386.00. In Canadian dollars it was at 8386.00 X 1.5742 = 13,201.24. On Nov. 12, 2004, the US dollar was at $1.1925 Canadian and the Dow at 10,539.01. That made the index 12,567.77 in Canadian dollar terms. Even though the Dow was up 25.67% in US dollars, in Canadian dollars it was down 4.80%. A Canadian investor who bought the Dow on Nov. 12, 2002 would be sorely mistaken if he believed he was ahead 25.67%. He was actually in the red! The Dow would have to be at 11,070.22 to just break even!

Now this is quite a difference from our first table. As far as stock exchange indexes goes, the TSX handily beat the Dow and the NASDAQ in all time frames. Over two years, the TSX has done twice as well as the NASDAQ. Even gold and the XAU have failed to beat the TSX for the year-to-date and two year periods when converted to Canadian dollars. Longer time frames for gold have fared better.

This doesn’t mean that investing in US stocks is a bad idea. If you are a short term trader and a good stock picker, there are certainly gains to be made. And if you’re an options trader, the US options market offers a much larger variety of optionable stocks with substantially more volume and liquidity.

The big question is, will the US dollar continue to slide? As long as the US government fails to come to grips with its massive debt and deficit, the US dollar will continue to sink. With Dubya back in the White House, that is likely to be the case.

Several prominent commentators have come out predicting a continuing decline in the US dollar. A headline in Friday’s Financial Post cited James Grant, founding editor of Grant’s Interest Rate Observer. “Grant calls US dollar to keep falling,” it read. Grant noted Thursday that Russia is facing a 12% inflation rate partly because of its policy of printing rubles to buy dollars to keep competitive. But like the Chinese man on the street, Russia may soon pull the plug on this policy.  If Russia and other buyers of US debt paper call it quits, US inflation will rise even faster than it is now as imports become increasingly expensive. 

In fact, currency analyst Jim Rogers, author of Investment Biker, thinks the Canadian dollar will continue to gain and will top out at around $1.06 US. That’s right! Rogers thinks the Canadian dollar some day will be more valuable than the greenback!  Where would you prefer to be invested?

Update May 26, 2007: As an historical lookback, the above article remains interesting. And it remains relevant because the Canadian dollar has climbed to 30 year highs against the US dollar. Since November 2004, however, the Dow has soared 30% and the NASDAQ has done the same, albeit in a much more choppy fashion. The price of gold is up around 50% and the XAU up around 30%, lagging the price of gold. The TSX, meanwhile, has soared well over 55%. In US dollar terms, since Nov. 12, 2004, the date used for the data in the article above, the TSX has climbed 74.12%.

Update Jan. 21, 2013: The Canadian dollar climbed above par briefly towards the end of 2007. It dropped back to US$0.80 in the market crash of 2008, then climbed steadily back to par again towards the end of 2010. It has fluctuated within a few cents of par ever since.  The US National Debt has continued to soar. The future remains uncertain. Chart at bank of Canada website


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