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Dollar Stalls With Higher Rates

November 3, 2005

In the wake of the US Federal Reserve interest rate hike on Tuesday, with no signals of an end to measured mindless moronic future hikes, the USDollar has failed to clear 90 on its index. In fact, 90 has become the "scrimmage line" of battle. Has anyone noticed that since midsummer, the last three rate hikes have failed to lift the DX index over 90? Correspondingly, the euro 120 level is defended in parallel fashion since midsummer. The major impetus for the USDollar is certainly not strong economic growth. It is without a doubt the higher interest rates offered by US Treasurys over foreign government bonds. Bond speculation from rate arbitrage is the engine behind the greenback. Gargantuan federal deficits and yawning trade gaps are the fundamental reality.

A carry trade is at work, which exploits interest rate differentials between the US and Europe and between the US and Japan. A few weeks ago, the Euro Central Bank held back and did not lower short-term rates. As the USFed hikes further, as they did this week, the rate differential widens. In Japan, short-term rates are virtually zero, and long-term rates have been mired at 1.5% for months. The stock bull market is in Japan, as the Nikkei index powers well north of 13000. It is all about the yen currency. The yen has reach two-year lows. Their exporters love it.

In the United States, the Q3 GDP was reported to have 3.8% growth. That is a nice fairy tale story. The price index employed +3.1% in the calculation. A figure of 6% might have been more realistic, but that would render GDP growth of nearly zero. So fageddaboudit. The GDP Deflator series is actually lower than the laughable Consumer Price Index. My contention is that most of the reported economic growth is nothing more than improperly adjusted price inflation. The purported growth surge in the third quarter just coincidentally occurred when gasoline, diesel, and natural gas costs escalated!!! Sure, urban consumer products for a basket of goods have tame prices. This means costs are rising, prices are not, and producers are being squeezed. Meanwhile, households suffer from higher energy costs, even before the heating season. They are also being squeezed. From his ivory tower, Federal Reserve Chairman Greenspan is oblivious, eager to write his own legacy. Before Congress in a testimony today, Chairman Greenspan was asked.

"Mr Chairman, you claim we are on a strong economic footing with inflation contained. So why is that we have unprecedented federal and trade deficits? We have a nation embroiled in an unpopular costly Iraqi War. We are adapting to a big energy shock still. My constituents all wonder if this is so, then why does everything cost more, and why does everyone seem to be so worried about the future?"

His answer to the panel was more of the same defense in lofty tones, in other words more obfuscation and greenspeak enthusiastic talk about forward momentum. Without a doubt, he believes the economic numbers, despite their incredibly corrupted falsification. He does cast a cannon shot across the USGovt ship bow, with warnings that higher federal deficits will continue to lead to higher interest rates.

Look for yourself at the USDollar index chart. It has not been powered higher by more attractive interest rates. One must ask whether the US$ exchange rates will fall in unison, as the buck declines, when the USFed stops the rate hikes. The end of rate hikes could come at any month, or when Bernanke is sworn into office in February. One must ask whether US exports will be hindered, since the clownbuck has remained elevated for most of this year in a long-lasting bear market correction. Look for the next trade gap report, out next week, to reveal continued if not widening trade deficits. US exporters need a lower US$ exchange rate, not a higher one. The financial sector needs a strong US$ exchange rate in order to attract foreign money for stocks and bonds and housing. So the two worlds are deeply at odds.

Already, Toyota has seen a nice 5% gain in earnings, attributed primarily to gains in the yen currency. Their car prices in the US marketplace have come down, precisely when General Motors and Ford are experiencing horrific financial problems and product mix snafus. See the Sport Utility Vehicle centerpiece to profitability, which has collapsed.

The DX chart appears to contain a significant double top pattern. A failure might be in progress. With each rate hike, the DX index rises to challenge 90. But afterwards, the index relaxes, as the euro finds a way to jump over 121 again. We do have in the DX chart both a rising 50-day moving average and a rising 200-day moving average. Higher interest rates simply are not working their magic. Will the 90 level give way and be broken on critical resistance? Time will tell. A higher interest rate environment should harm the US Economy from a borrowing cost standpoint. However, a possible bullish Head & Shoulders pattern might emerge. If the 90 level is broken, look for a powerful move toward 100.

It could be that the FOREX market, where smart professionals congregate, does not believe the GDP numbers, nor the CPI numbers thrown at their feet with contempt. The public might believe the faulty numbers, but the extreme experts might not. The USDollar is being kept elevated from the continued measured interest rate hikes, nothing more. The ultimate insult delivered by FOREX to the USGovt might be for a new decline in the USDollar despite at least one or two more incremental interest rate hikes!!!

Traders might anticipate the transition to a Bernanke Federal Reserve, and the timely challenge to his rule. In 1987, the newly appointed Chairman Greenspan was greeted by a six-month decline selloff in the USDollar, which led to an interest rate rise all year long, culminating in a stock bust known as Black Monday in October 1987.

The gold and energy sectors are in a funk. REFCO, with all its corruption and naked fraudulent short trades, is weighing on the sector. In order to raise money, many hedge funds within the REFCO sphere have seen fit to sell shares of stock they do not own, without money offered in escrow margin. It is pure fraud. Higher interest rates are weighing on commodities generally. Hedge funds have reported massive losses, as they scramble feverishly to raise cash. Even Jimi Rogers is caught in the web of deceit and damage.

These and other topics are covered and analyzed in the November issue.


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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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