Wednesday, March 2, 2011

The Dollar, and The Next Ten Days

I’ve never been much of a fan of technical analysis. It’s always struck me as something akin to reading tea leaves—and just as batty. But on the other hand, I’ve seen enough technical analysis deliver accurate predictions that I can’t really dismiss it completely. 

Right now, the world is going through a pre-crisis mode—you can practically feel it in the air. The limitless deficit spending by the U.S. Federal government, which has instituted systemic +10% of GDP deficits year after year; the insane Federal Reserve policy of Quantitative Easing 2, which is nothing more than debt monetization as I wrote here, enabling the Federal government’s addiction to deficit spending; the popular uprisings sweeping through the Middle East and North Africa, affecting—wouldn’t you just know it—oil producing countries one after the other; the steadily rising food inflation, which in fact triggered those uprisings in Tunisia, Egypt and Libya, and which are beginning to affect the entire globe; the inevitability of a collapse of the euro—the other major world currency—because of the systemic tensions affecting the European continent, between the strong economies of the north, and the weak economies of the peripheries. 

All these issues are bringing renewed pressure on the dollar—though which direction the dollar will react to that pressure is the issue up for debate right now. 

The next ten days will be key: Will the dollar spike up? Become the safe haven of everyone fleeing from the world’s troubles? Or will the dollar nosedive, the first big step down in its death spiral?

This is where we’re at—and this turning point is happening now: Right now. Consider this chart, sent to me by my friend in Hong Kong, Michael Hampton:


Click to enlarge.
Technical analysts have all sorts of pet names for various formations—“cup and handle”, “head and shoulders”, etc. I have no idea how tea leaf-readers would call this bouncing off the bottom trendline that we see in this three-year cart—“dribbling the floor”? “Harlem Globetrotting”?

Whatever cutesy name you want to call it, it shows something sort of ominous: It shows the dollar index touching a bottom trendline, just as problems in the rest of the world are peaking.

The two simultaneous problems that are peaking in the rest of the world are rising commodity prices, and rising unrest in oil producing countries.

Michael is a great guy, a very smart man: He’s of the opinion that these two issues ultimately lead to the same thing—extremely high inflation, if not hyperinflation, as I have argued.

But he thinks that, before high inflation starts hitting us all at the grocery store and the gas pumps, there’ll be a risk deleveraging. As a result of this, he’s thinking that there will be a snap-back of the dollar (and the Treasury bond), as people run for cover and/or try covering their risk-on bets.

He sent me another chart, highlighting the euro:

Click to enlarge.
His conclusion off of this chart was that the euro—because of the systemic problems of the continent, of which we’re all aware of—was poised to sink lower: The top trendline was the ceiling it couldn’t breach, just as the dollar’s trendline of the previous chart was the floor it couldn’t break through (for now).

So to Michael, considering the macro perspective of the world’s situation, the risk-on leveraging that has gone on because of the Fed’s ZIRP, and the inevitable flight to safety that will occur/is occurring because of the troubles in the Middle East, there will be a flight to the dollar and dollar-denominated assets (ie. Treasuries)—and a spike up of the dollar index.

At the same time, the euro will spike down, for precisely the same reasons: After all, Europe is one of those global trouble spots.

The above two charts would seem to bear out this analysis: Dollar up, euro down.

Sounds sensible.

But what if we flip the analysis: What if—rather than both trendlines being the floor of the dollar and the ceiling of the euro—these trendlines were broken over the next few days? What if the dollar fell—and the euro rose?

This is not so impossible: Keep in mind that the Germans are particularly averse to inflation—and they are uniquely positioned to do something about it. The eurozone producer price index came out today—and it is rising, signalling an imminent rise in the eurozone consumer price index. Coupled to that objective metric of euro inflation, the ECB has used up its juice with the Germans, insofar as bailing out the PIIGS is concerned—Berlin has no interest in bailing out another eurozone member, no matter how bad the situation gets.

So the ECB will have to stand tough on the euro, or risk hell with the Germans—which the ECB and the other eurozone members cannot afford.

On the other hand, the Federal Reserve is signalling it won’t raise rates even after it has finished buying up Treasuries via QE-2. In fact, it’s not even a sure thing that the Fed will end QE-2, as there are already rumblings of an extension of the policy.

So what if the euro breaks upward, because of the German phobia of inflation? What if the dollar breaks downward, because of Federal Reserve irresponsibility?

As of this morning, the situation looks grim, if you know what to look for: Gold is trading at record levels, after rising overnight. The dollar index has broken below 77, but not decisively, hanging around the 76.8 and thinking it over. Libya’s Gaddafi is striking back at the Eastern Rebels, which is interrupting oil production in the country. And as I mentioned before, this morning, the euro producer price index rose enough to freak out the Germans.

Therefore, today—Wednesday, March 2, 2011—is a key date: Over the next eight trading days, we will see if the dollar rebounds above 77 on the index, or if it breaks lower.

If it bounces back up, we’ve kicked the can down the road a bit.

But if it breaks lower, then this is the beginning of the death-slide of the dollar.

Stay tuned to your Bloombergs, it’s gonna be a bumpy ride.

If you’re interested, you can find my recorded presentation “Hyperinflation In America” here. I discuss in detail what I would do, if and when the dollar crashes. 

36 comments:

  1. I'm fully on board with your over indebted hyper inflation predictions, but this trendline is not that significant. Look at the chart over a little longer time frame and the various horizontal levels look more important to me than this trendline.

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  3. Perhaps I can be of assistance with respect to technical analysis and the chart you have posted. There is no such thing as a triple bottom, in the case of the dollar chart, a quadruple (rising) bottom. Why? Because if a market makes that many forays into the support or resistance zone without leaving it far behind permanently in a subsequent reaction, the support is, by definition, weak and will be decisively penetrated.

    In the meantime, the dollar index chart that your friend has provided is merely a measure of the dollar against other currencies. This of course, just highlights just how weak the dollar is, since it is among the most feeble of the feeble. In summary, the support on that chart will give way.

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  4. Can I be honest? You completely lost me with this one. I would guess that I'm not the only one here who could use a bit of explanation as to what the financial chicanery means (insert image "Are you a wizard?")

    I know what you mean by 'feel it in the air' though. Times are far too interesting right now.

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  5. Your point about Germany wanting to hold the line is taken. Obviously the Germans want to stop the inflation. But in practice they have been willing to create bailouts under duress. It seems that the threat of cascading bank failures across Europe is too scary to contemplate. In the end, even Germany may inflate.

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  6. I hope the dollar bounces back hard. That'll permit me a chance to snatch up some junk silver coinage lots on EBAY.

    I think U.S. coin with 40-90% silver content may become our default means of exchange in the post Global Monetary Union underground economy.

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  7. I notice that Saudi Arabia has a "Day Of Rage" planned for the 11th. Be interesting to see how the Committee for the Promotion of Virtue and the Prevention of Vice reacts to that...

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  8. GL,

    If the total stock of money supply (M3) is arranged from highest to lowest, Dollar would be the highest right? So any nominal debasement of the Dollar would be a much smaller fraction of the total amount of Dollars already in circulation - correct?

    That means of all the foreign currencies, Dollar is the most stable primarily because it is the most traded currency.

    Through the above reasoning, I tend to think that Dollar may not be the first currency to crash. Would be glad to hear your thoughts on this.

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  9. To be technical about the technical analysis, the charts are not quite right in that they should be in logarithmic scale on the right side, and not arithmetic scale. Log scale shows up trend lines much better. In log scale, the current fall has just a little further to go before it hits the support line. In terms of fundamentals, if everyone is of the same opinion, then that's when the opposite happens. Having said that, these are not normal times. Strange how we've had so many bubbles and busts, commodity surges first in oil, then soft commodities and now oil again, risk of sovereign debt default, outright fraud and immorality or should that be amorality in financial dealings, etc etc and etc. To me it's quite obvious that there is an oil resource war going on with the US trying to get control of the Middle East oil. I also think that the US is trying to destabilise China. If one accepts that there is an oil resource war going on as we speak, then by extension, we've got peak oil. The modus operandi to unsettle China is a well tried one, used on Japan in the late 1980s and then on the Asian tigers after that. Induce hot money inflows into the victim and when they over-heat, pull it out. China can't keep growing at any pace - there isn't that much oil in the world to satisfy all our needs plus theirs. Additionally, the Saudis are lying about how much oil they've got. After they nationalised their oil and kicked out the foreign oil companies, they immediately doubled their known reserves without announcing any new finds at all. And they've got very old fields now, requiring salt water to be pumped in to sweep the oil out. Unless of course, they are hiding more oil in their Empty Quarter ... who knows?? The authoritarian changes, one might even say fascist alterations to the structure of the US government, is strange unless one sees more social chaos coming in the future. Once again if peak oil is upon us, then the system will inevitably start to break down and would require increasing government control to protect the ones who run the show behind the scenes. Maybe the puppeteers are intending to bring the system down in advance of peak oil doing so. Also demand destruction would be required to slow down the rate of oil field depletion. Hence the deliberate inducing of excessive debt, and now poverty as this is dealt with. Food stamps, tent cities in the US are testament to this. The increasing stimulation by the Fed is just rubbish and they know it. It appears that we are being led to some new arrangement. Utterances by the IMF about dealing with the financial crisis with issuance of special drawing rights, maybe with some backing by gold, presages a new world reserve currency. So maybe we are headed for another crisis which prompts more calls for a new reserve currency and the replacement of the Fed by some other organization. My money would be on the BIS to take over. And don't forget that the BIS and the IMF are under US control. Interesting times we live in but I'm not sure that the future will be so halcyon.

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  10. Ask Williams what "he was told" will happen and he would tell you: Once the Euro falls, the dollar will fall 2-3 weeks later. If he's wrong, we'll know soon enough.

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  11. GL said ... "Right now, the world is going through a pre-crisis mode—you can practically feel it in the air. "

    Very well said. Political and economic alignments are breaking up in the world and changing. Change is not always a bad thing. But in this case it represents an "uncontrolled change" that probably takes power away from the old US financial empire. We'll see.

    I was going to mention the US dollar to you. This is not a super-complicated analysis. Just watch $USD at www.stockcharts.com and see if it trades outside the line of support that has been controlling it for the last 2-3 years. It actually doesn't matter if the movement is down, sideways, or somewhat upwards. It only needs to go outside that lower resistance line (plotted on a long-term chart!! People are so glued to daily market movements that they miss the big picture). An outside move for the $USD will cause many investors to change their assets, and possibly re-evaluate safe havens for their wealth.

    PeteCA

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  12. Will, you may get your chance. Many technical analysts (not all) are predicting what's called a three year cycle low between now and the end of May of this year. This low is expected to breach the 2008 low of 70.70. But the scary part (according to TA analysts) is that the dollar should THEN EXPLOSIVELY CORRECT and have a big rally.

    So (according to TA) we should see a low below 70.70 between now and the end of May. Then a corrective dollar rally afterwards. What this means is that precious metals, commodities, and oil are going to skyrocket between now and May. And then they will have a correction when the dollar rallies.

    Longterm, this likely means the dollar deathspiral begins here. Lower lows, lower highs. Meanwhile, the PM's, commodities, and oil are going to continue to have higher highs and higher lows as their bull markets persist. We'll still see corrections from time to time, but this is normal market action.

    When we have this PM correction after May, it will be called a D wave correction by technical analysts. It'll be a good time to jump in to PM's. Keep your powder dry and watch for it.

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  13. @Schadenfreude

    If I'm not mistaken, Dr. Paul Craig Roberts said that SDRs (Special Drawing Rights) are not allowed to be backed by gold according to the rules of the IMF.

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  14. Gerald Celente, Webster Tarpley, Paul Craig Roberts, Max Keiser, Wayne Madsen, Lindsey Williams, etc. The real people who tell it like it is - listen to them and be prepared.

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  15. GL,

    Is $USD the best index to be using to judge the value of the dollar, as I understand its weighted 57% to the Euro but only 7.9% of total trade*.

    Canada is 16.5% of US trade but only 9% of $USD.

    Does the $USD measure the strength of the dollar accurately? What would be a better measure?

    *Trade data from:
    http://www.census.gov/foreign-trade/statistics/highlights/toppartners.html#total

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  16. A line you often hear is that the Germans will act to prevent massive inflation in the Eurozone. Ostensibly, this is because of their collective historic memory of Weimar hyperinflation.

    However, the assumption behind this argument is that there are Germans in power in Germany who have the best interest of their own country in mind. If this were the case, then yes, perhaps they would do something about hyperinflation.

    In fact if they had their own country's best interests in mind, they would quit the euro and go back to the Deutsch Mark.

    But if you listen to the rhetoric from the German mainstream media (who are simply mouth pieces of the ruling elite), it becomes clear that no such steps will be taken.

    Of overriding importance to these people is the survival of the euro. All else is subordinated to that objective. If saving the euro comes at the expense of high inflation – so be it.

    The German elites have invested so much ideological capital in the EU that it will be virtually impossible for them to abondon this dream. The way I know them, they will be willing to sacrifice Germany for the sake of their ideology.

    Aside:

    The idea that Germany can quit the Euro assumes that Germany is a sovereign nation state that is capable of taking such action. It is not! I believe that Germany is firmly in the hands of a cabal and will be squeezed till her pips squeek.

    This group includes the German elites who are German only on the outside. On the inside they are golbalists, or at least Europeanists. They brought Germans the Euro against their will, without ever asking them, they have handed sovereignty over to Brussels without ever consulting the people, etc.. I know these people. They disdain Germany - their own country.

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  17. I am not a believer in technical analysis but I agree with you that the next 10 days will be crucial. If turmoil spreads to another oil producer, it will trigger a market shock. Where will everything go from there? It's a wait and see game...

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  18. One of school of technical analysis involves the belief that markets trend, consolidate and pullback a bit, then continue the primary trend again. earlier in this year we saw the dollar index fall to 76; it then bounced to 80. if we were going to have any type of real recovery in the dollar, like what the deflationists imply and what we saw in Q4 2008, it would have occurred by now and the dollar index would be above 80. the fact that the dollar index could not hold above 80 suggests to me the pullback from 76 to 80 was just that -- a pullback -- and that we are now set to resume the trend downward. i do think we will bounce off the previous lows in the 70-72 area, which i think would bounce to around 76-78, depending on how things are going and what the charts reveal. then the next leg down from there will be the truly painful one as we will be setting new lows on the dollar index and thus closer to freefall territory, in my opinion.

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  19. Hello Mr. Lira,
    What has become of the Hourly G? No updates in the past two weeks... Is it dormant or have you moved it?

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  20. I have two family members in the US Armed Forces...they BOTH said the same thing this week...IF Saudi Arabia falls(and thats concern #1) then look out....its gonna get really ugly....really fast....EVERYWHERE....

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  21. Technical analysis is just interpreting graphical pictures of the emotions of crowds. A technician will look at the two charts you show, the dollar and euro indexes, and say that they have both reached trend decision points. If the dollar breaks through its line of support he would sell the dollar, and if the euro breaks through its line of resistance he would buy the euro, in both cases taking into account the external news driving public opinion at the time of the breakouts. It's not rocket science and it's not strictly deterministic, but technical anslysis does give you an edge, and that's what you need to beat the house.

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  22. I've been watching the US Dollar ETF: UUP
    http://stockcharts.com/h-sc/ui

    The dollar is sitting on the floor and not bouncing. When it breaks through the floor there is no support below....

    gh

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  23. The U.S. will muddle in the affairs of Libya. This will piss off the Arabs who do NOT want the U.S. to intervene in any way. The Arabs retaliate by dumping dollars and reducing oil supplies.

    Now back to reality. The U.S. dollar is facing a volatility squeeze. The intra day trading will compress - trading range narrows - volatility is squeezed. The longer it squeezes the greater the movement down.

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  24. "... just as problems in the rest of the world are peaking."

    Peaking? As in we are almost past the worst? Gonzalo, your hidden optimism is showing!

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  25. GL - 2 things:

    1) You said "Over the next eight trading days, we will see if the dollar rebounds above 77 on the index, or if it bounces back up."

    Is that a typo? Isn't rebounding above the same thing as boucning back up?

    2) In conjunction with the 7:26 PM comment re: The Hourly G, what about The Trooper?

    I hope you were't affected by the recent earthquake -

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  26. The recent revelation that the rising oil prices in the fall of 2008 and then the attack on our financial institutions in 2009 were premeditated attacks intended to destroy the U.S. economy changes everything. This is not a simple deep recession it is an attack by some as yet unknown nation/state, it is an act of war. A response is in order and the response must be appropriate for the provocation. This cannot stand, the attackers must be killed and the attacking country must be destroyed. If destroying it economically is impractical then destroy it physically. Iy is becoming clear this is an us or them situation.

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  27. I think it is all about Saudi Arabia. All of this market turmoil is not about Lybia. Did you see the Saudi market fell 15% this week? Personally, I think that was the royal family moving money out and into secret offshore accounts. After seeing Lybian and Egyptian assets frozen, the royals are terrified. Couldn't happen to a nicer group of people.

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  28. China put nails in its coffin these past six months. And in response the dollar is soon going to rise dramatically.

    TA is an art-form. It does help, however, if I have access to data that you do not.

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  29. Not too be too negative bout your analysis but the fact is that when the Euro tanks they will both most likely finally fall off the "I'm in debt too deep and can't pay it anymore" cliff. The US is only benefitting from the delayed woes of a few of it's still a bit rotund states, Europe only has one left.

    The robbing Peter to pay Paul has gone too far and we're about to Peter out.

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  30. "the world is going through a pre-crisis mode—you can practically feel it in the air"
    I travel a lot for business and I don't feel it in the air, I see it in people's eyes. In the last few weeks, trips to Spain, Barbados, Jamaica, Mexico, Guatemala and Venezuela, I've seen people that have lived in poverty for years, but you did not see hunger, rampant crime and despair as a result of stagnant wages and rapid inflation. It's getting to the point of people losing hope for a better life and it is likely going to get uglier soon.

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  31. Ive read that we really went bust in 2008 and have just kept it afloat with printing money,I guess everything has its limits.I travel the usa a lot and the amount of empty commercial buildings is very alarming,lastly the stock market and the country in general reacts to the words from our government,i see no positive talk to rally the nation in any way.president Obama wouldnt be the coach of a winning football team.If i wanted the country to go down the tubes id follow the obama model.RW

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  32. Well, it did not bounce back as of 3.5.11, for the dollar sits at 76.407 on Bloom. So lets see what next week brings, for this past week saw a substantial climb in silver to 35.67 (Kitco). I'm betting on silver and expect to hit $40 by the end on March. Large Forex position betting it does and the dollar declines.

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  33. I think rather than look strictly at central banks, the ECB, wall-street, we need to examine the socio-economic discontent.

    Austerity measures are the catalyst that will make this into a problem for everyone. The cutting of public sector jobs will trickle down and kill more private sector jobs.

    The same protests in Europe and North Africa will burgeon beyond Wisconsin.

    For me, this is the sign that things are falling apart rather quickly. Airfares are out of control, and you will see that as oil/gas rises, food prices do as well.

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  34. Anonymous Financial Prophet

    I'll spare you and everyone else the tension of knowing what will be. The dollar will without a doubt DIVE... when, is a better question. But all the indicators are there that it is going downhill as more and more countries locally, are not looking to the dollar as the currency of choice, like Mexico or other european countries. Purchases online are more and more in euros not dollars. Wake up! And smell the coffee... No need to theorize the obvious.

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  35. Catherine CrabillMarch 8, 2011 at 6:44 PM

    I beg your indulgence injecting a spiritual lense over the events you are covering. I am not an economist, but I am a disciple of Jesus Christ and the prophetic accounts of the end times. I believe we find ourselves at this threshold today.

    As I have studied the Four Horsemen of the Apocalypse (Revelation 6) this is what I believe to be true. The first Horseman rides a White Horse of *Conspiracy (*my conjecture, not scripturally stated as such…) carrying a bow, (take note, no arrows…) and a crown. I believe the symbolism shows a ‘diplomatic’ cadre, not using force, (no arrows), but the impression of force, (the ‘bow’) and authority, (the ‘crown’) of wealth and political stature. It has been documented that this administration along with George Soros sponsored groups to ‘community organize’ in these Middle Eastern countries.

    These agent provocateurs lay the ground work for the Red Horse of violence that follows.
    Promising the people in these dictatorial regimes liberty and self-determination, the people have become willing pawns, useful idiots, in the conspiracy to overthrow these tyrannical governments, not understanding that the replacement government is already prepared to take control. The Muslim Brotherhood, in alliance with global communist forces, is poised to step into the void.

    The violence we’ve seen is child’s play compared to the resultant conflagration to follow Israel being backed into a corner. I believe this is the precursor of the broken Seal of the Red Horse of Violence. Obama intends to lift only one finger toward Israel at this time, this will be his middle finger. Israel will be forced to go nuclear, this is known as their ‘Sampson Option’, accepting the reality that the nation may not survive, but either way, they will not surrender without a fight to the death if necessary.

    Enter the Black Horse. The Scripture references describe a crust of bread in exchange for a day’s labor. I believe this represents financial disaster. As you can reasonably conclude, with massive, violent, conflagrations erupting all over these nations that will affect the whole world by the disruption of global access to oil, the fragile worldwide economic structure is ripe for collapse.

    Billions of desperate people with food production and distribution interrupted and no economic means to buy food even if it was available will set the stage for the entrance of the Pale Horse of Death and Hell. Global violence, unprecedented in the history of mankind, will explode as the New World Order elites wrestle for control decimating one fourth of the world with sword, hunger, and death.

    On a spiritual level, The Good News is salvation in Jesus Christ who warned us of these days and provided The Way of escape through faith in Him.

    On a practical level, please consider investing in as large a storable food supply as you can afford. With our inflating currency your dollar will buy more today than it will tomorrow. Anything you can do to prepare your household for upheaval, be it naturally occurring storm or demonically inspired strife, will lessen the impact of the temptation to panic and add to the greater orderly response. Be part of the solution, in other words, rather than the problem.

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  36. Well it's 14 days later and the dollar is still hovering around 76, thanks in part to the Japanese earthquake. I see a longer term downward trend though.

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GL