Weakness of the USD…………………………

Looks like the world has come to terms that the USD is not the preferred currency to be holding, especially since, all other major G7 currencies has cut their interest rates aggressively to within or near the 2% range; Switzerland at 0.50%, EU at 2.50%, U.K., at 2%, and Canada at 1.50%. Australia and New Zealand are higher at 4.25% and 5%, however, it is their historical lows.

The U.S., on the other hand has cut interest rates to near-ZERO!..............pretty much like Japan and we know what has happened to Japan for the past 14 years.

The Federal Reserve clearly acknowledges that the U.S. is in a deflation with the recent interest rate cut to 0.25%. It also suggests that the Federal Reserve has exhausted using interest rates as a monetary measure/policy. The action also affirms that inflation is not a concern now that deflation has become a reality and the recession a bigger problem.

It is left with fiscal policies to work with to stimulate the economy which is why the potential US$2Trillion expenditure…….huh…….deficit……….. by the impending Obama’s administration over the next two years. It might just work……….like the days of Reaganomics………..spend and spend and spend…………spend your way out of a recession and simultaneously, build a record high deficit. This was what happened back in the decade of the 80s under Reganomics…………till the bubble burst in 1990, and Bill Clinton ‘aka the Laundry Man’ came in to clean up the mess.

The lack of confidence by the American public is overwhelming with rising unemployment and falling real estate prices………….people just get scared and become paralyzed and it is going to get worse in 2009.

Corporate earnings announcements in Q1 2009 will be horrific and will send the stock market into the basement. We have to remember that though the current prices are attractive, however, based on future earnings, the price levels are still high. We must always remember that the price of a stock is the future cashflows discounted back to net present value.

We believe the worst is yet to come for the U.S., and the economy may hit rock bottom by the end of 1H 2009. At that time, opportunity will present itself for the brave and sophisticated to ‘dive’ back into equities at low low prices and then ride the roller coaster ride back up.

What that means for the U.S. Dollar is that it will probably continue to weaken till the middle of 2009, thereafter, when gold is exchanged for US. Dollars to buy into equities and foreign funds start investing back in the U.S. stock market……..the U.S. Dollar will strengthen!