The Dollar Weakens Further

It may eventually turn out to be nothing but a head-fake. Then again, it may signal the resumption of the dollar's downtrend that I have been expecting. What I am referring to of course is the weakness in the dollar this past week.

The US Dollar Index fell 1.02% on the week. It ended Friday at 84.57, the lowest level in two months. This recent weakness can be seen on the following chart.

We can see that the Dollar Index is breaking down. I already commented on the weakness developing in this chart. In my July 26th alert I noted: "The Dollar Index has not managed to climb back above the green line marking the 2-year uptrend channel. I therefore expect that it won't be too long before the Dollar Index begins falling away from here." The Dollar Index had closed that day at 85.93.

That initial sign of weakness has now been followed by this new 2-month low. The next indicator to confirm the downtrend will be a break in the index below 84.

We all know that the long-term prospects for the dollar remain bleak. The huge trade deficits and more importantly, the soaring federal debt are going to be funded with newly created dollars. So even though the Federal Reserve no longer reports M3, which is the total quantity of dollars in circulation, we know that the supply of dollars will increase.

Rising supply is not the only problem. Demand for the dollar is weakening. Demand cannot be measured, but we know it is weakening from all the announcements by central banks and others that they are diversifying out of the dollar. For example, Italy's central bank is the latest in a long list that has announced a reduction in the amount of dollars they are holding.

For any good or service, rising supply and falling demand mean a lower price. This same principle applies to money, with the result that the money's purchasing power declines. This result is what we normally call inflation. And we clearly see prices rising pretty much across the board. The dollar is being inflated away, which is bullish for gold and silver.

Published by GoldMoney
Copyright © 2006. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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