Although the Euro and Swiss Franc have been in a long term uptrend verses the falling Dollar, over the last 18 months the Dollar temporarily halted its freefall as short-term interest rates rose in the United States. Yesterday after 17 consecutive increases at each Fed meeting since June 2004, the central bank voted to hold its benchmark interest rate steady at 5.25 percent.
These quarter point increases in the Fed funds rate once the pattern was set began to artificially support the value of the Dollar at its low point verses other currencies beginning about six months later in January of 2005. You can follow the slight downward trend of the Swiss Franc over the period when compared to the rising Dollar in the second chart shown below. Beginning around the time Ben Bernanke was sworn in as Fed Chairman on February 1, 2006, investors began to factor in at least a short term halt in interest rate increases by the new Fed Chairman. This is when the Dollar weakening began as shown by the increase in the value of the Swiss Franc compared to the Dollar in the lower 2 year Swiss Franc/Dollar Chart.
Above the Chart from http://www/bankrate.comThe Fed Is Between A Rock and A Hard Place
The Fed is caught between trying to hold the line on internal inflation which is rising due to exploding oil prices etc. with higher rates while walking a tightrope due to a weakening economy over burdened by the dramatic increase in mortgage payments from the short-term rate increases on the new style adjustable-rate mortgages. This is further compounded by the beginnings of a pullback in real estate values and and the loss of temporary home equity in some of the areas where record low interest rates created a housing bubble like in Florida and other large metropolitan areas. Frankly, rising adjustable-rate mortgage payments is beginning to take a bite out of an already slowing economy for lower and medium income citizens and a temporary hold on interest rate increases does nothing to reduce the impact of the previous 17 rate increases.
What Will the Fed Do Next?
They will in the end choose the course of inflation as the lesser of the two evils as the politicians will be able to blame the inflation on rising oil prices, the War on Terror and the over all Middle East turmoil and a likely coming war in the Middle East. Neocon strategists like Newt Gingrich are already laying the ground work for the false premise that America is now in a Third World War. As you know during war time "anything goes" and Americans will probably loose more wealth and financial freedoms during this real or perceived crisis.
Although America is probably in a near term plateau on rates, you can expect another far shorter round of interest rate increases down the road early in 2007. Notice, this scenario assumes "maybe in error" that the GOP will luck up and retain control of the House and Senate. So in the short run we expect further Dollar weakness followed by a brief holding pattern as rates ratchet up up through mid year in 2007. After that, with the Presidential Primary Election focus and a general election in November 2008, we expect interest rates to fall in order to hold the US economy together up until the election. This will likely be the time of the greatest Dollar weakness with the outside possibility that the Swiss Franc could equal or exceed its value of 88 cents reached during December 2004. Depending on the Middle East situation and oil between now and the 2008 election even a brief parity in value with the Dollar might be attained. This is not a bad move in the Swiss Franc from its 58 cents low in early 2002.
Plan For Inflation: Bernanke Will Choose the Lessor of Two Evils!
So we believe, regardless of the long-term downtrend in the Dollar, the Fed will be restrained from more than another short term round of interest rate increases as Fed Chairman Ben Bernanke prefers inflation and a weak Dollar to domestic recession and depression. Inflation can be blamed on others by he and the politicians while a serious recession or depression will be blamed on them. Hence, expect a general trend for a falling Dollar and slowly rising inflation here in the United States between now and the 2008 election. In 2009, and of course, all of this is subject to change depending on markets, world events and politics, but we fear the general trends will accelerate.
At the left the Two Year Chart of the Swiss Franc/Dollar from http://www.yahoo.com
Investment Suggestions:
1 - Get out of the Dollar.
2 - Invest in inflation hedge type investments ranging from gold, hard currencies like the Euro and the Swiss Franc and some real estate preferably raw land outside of major cities where property values have already skyrocketed during our low interest rate environment. .
3 -Invest in global portfolios and investments outside the Dollar and US investment markets as financial investments like stocks and bonds historically do not do well during periods of rising inflation.
Above the Five Year Chart of the Swiss Franc/Dollar from http://www.yahoo.comRonald Holland, President of The Swiss Confederation Institute at http://www.swissconfederationinstitute.org writing for "The Inner Circle Reserve Bulletin" published by BFI Consulting at http://www.bfi-consulting.com
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Ronald Holland is editor of this website and a broker/realtor with
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