The Dollar Divide: Why the World is
Choosing Sides Over the Falling Buck

Today's comment is by Sean Hyman, our Currency Director and editor of The Money Trader.

Dear A-Letter Reader,

If you were to roll the hands of time back just two or three years, there would be no question about the U.S. dollar and its "reserve currency" status.

However, today that's another story. In fact, several central banks have already cast their vote to detach their currency's peg from the U.S. dollar.

In fact, on July 21, 2005 both China and Malaysia de-linked their currency from the dollar. Now they've got their currencies pegged to a "basket of currencies." While they like to keep silent about what these other currencies are, most traders suspect this basket involves the euro, pound, yen, etc.

Now roll the hands of time forward a bit. In May of this year, Kuwait dropped their peg to the U.S. dollar. Then in July, Syria followed suit. That's huge.

Saudi Arabia is known for following the Fed's lead. The nation raises their interest rates when the U.S. raises them and cuts when the U.S. cuts. However, recently when the U.S. cut rates, Saudi Arabia kept their rates the same. Does this mean the Saudis will soon cut their ties to the buck and run? It could happen. As soon as next month, some Arab countries will start discussions along these lines.

Then there's the United Arab Emirates. The UAE central bankers recently stated that they are considering dropping their peg to the dollar. And I'm betting the UAE will.

Why would I bet this one would happen? Well, they do more business with Europe than the United States. Also, in a speech almost exactly a year ago, the governor of the UAE central bank stated "I expect the euro to become the currency of international trade and investments in ten years. If we add to that tourism, the euro will surpass the U.S. dollar, as the first currency in the world by 2015."

So my hunch is that the UAE will drop the dollar peg the first moment that the UAE central bankers feel it's safe to do so. I don't think this will be very far away.

The central bankers in Hong Kong stated that it would be impractical to de-link from the dollar and link the Hong Kong dollar to the yuan instead. They claim that their economy is in a different stage of development and it wouldn't be in their best interests to depeg.

However, they did say it could be considered when the renminbi (or yuan) was freely traded and developed into a reserve currency. So you can see that there may come a day where even the Hong Kong dollar isn't pegged to the U.S. dollar.

For now, Hong Kong central bankers have stated that the dollar peg has been a "cornerstone" of their monetary and financial stability. They said that it was an "anchor of investor and consumer confidence."

On top of all of this, Hong Kong bankers have defended the dollar peg by selling Hong Kong dollars on three occasions since Oct. 23 to bring down the exchange rate. In fact, the third intervention was 10 times larger than the previous interventions. So obviously, they're telling the market how serious they were about it.

The HKD (Hong Kong Dollar) has been pegged to the U.S. dollar since 1983 but before that, it was pegged to the British Pound. So while they've been known for long stretches of commitment, they've also been known to eventually change.

Look for that next change to be to the yuan sometime after the yuan is freely tradable.

Even with all this bearish dollar news erupting all over the world, I still see the dollar heading for what traders call a "dead-cat bounce" next year.

In the short-term, there are very subtle signs that the dollar could rally in 2008, before continuing its slow steady downward slope into 2009. Actually, the fact that nations are dropping their dollar peg is a sign that we're reaching a tipping point in the markets. As I often say, when everyone in the world is bearish on a particular asset class, look for the markets to tip the other way. 

When that happens, make sure to use any short-term dollar strength to stock up on stronger foreign currencies.

SEAN HYMAN, Currency Director

A Green Christmas for Online Retailers in Europe

Investors, including yours truly, are growing understandably nervous about the health of the U.S. consumer amid the worsening credit crunch. Credit card issuer Capital One said earlier this month that it may take up to a US$5.5 billion charge this quarter for sub-prime related write-downs and unexpected credit card losses!

This is the doomsday scenario for the American economy. Debt-laden consumers account for 70% of U.S. economic growth thanks to their conspicuous consumption habits. But buyers could go on strike this holiday season. What if U.S. consumers just say NO  -  and refuse to whip out the plastic and charge-it,  -  it could be another big nail in the U.S. economy's coffin.

However there is another bright spot in the world of consumption this holiday season: Online shopping is booming, especially in Europe.

Norway, although it accounts for just fewer than 2% of the European online market, comes in second highest in terms of money spent online per shopper, while France is third. In Britain, Germany and Sweden online spending runs above average, with about 70% of internet users in these countries willing to buy online.

Increased broadband penetration in Europe, shoppers in a hurry, and "growing confidence in the speed and reliability of online retail sales," should result in a 58% increase in European online sales this year, according to the article.

In the U.S., home to long-time online shopping giants like Amazon.com and Ebay, "the online spending growth rate is flattening off, although it is still in double digits."

Online sales in the all-important Thanksgiving to Christmas stretch are expected to total US$33 billion this year. That keeps the U.S. consumer on top online at least for now, but internet-savvy shoppers in the U.K. are not far behind.

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR'S NOTE: This credit crunch has literally affected every market  -  even online shopping. That's why Mike hosted a special "audio briefing" yesterday to tell you exactly how to shield your portfolio as this credit crunch unfolds. You can listen in right now for FREE. But you need to hurry. As of MIDNIGHT TONIGHT, this audio briefing will disappear from our website. So click here to listen right now so you don't miss out.

Privacy & Rights

No Competition for Uncle Sam in the Money Business!

Last week, federal agents raided the offices of "Liberty Dollar" in Evansville, Indiana, and confiscated all its property and equipment.

The Liberty Dollar is a privately circulated currency backed by gold and silver. There are various forms of Liberty Dollars, but the most popular one is a one-ounce round silver medallion.

Liberty Dollars are produced by the National Organization for the Repeal of the Federal Reserve Act and the Internal Revenue Code (NORFED). Led by economist Bernard Nothaus, NORFED has long been a thorn in federal government's side.

And now, the feds are getting their revenge.

There is little question that the production, sale, and possession of Liberty Dollars are legal. Indeed, in 1999, the Treasury Department's legal team reviewed the Liberty Dollar. Claudia Dickens, spokeswoman for the U.S. Treasury Department's Bureau of Engraving and Printing, said:

"There's nothing illegal about this. As long as it doesn't say legal tender there's nothing wrong with it."

That, apparently, is the rub. "Legal tender," in essence, means that a particular form of money must be accepted for all debts.

NORFED has never claimed that Liberty Dollars are legal tender. However, in recent years, the company built up a network of "Liberty merchants" who accept Liberty Dollars in exchange for goods and services.

The U.S. Department of Justice says that federal legal tender laws prohibit the use of privately circulated gold or silver coins intended for use as money. That may have been what led to the recent raid on NORFED.

Pursuant to U.S. civil forfeiture laws, the feds seized everything NORFED owns. All their gold. All their silver. All their platinum. All their bank accounts. All their cash. All their computers. They even seized the dyes for minting the coins they produce.

Uncle Sam doesn't want any competition in the money business. After all, all forms of currency the Fed deems legal tender like the Federal Reserve Notes and U.S. Mint coins are all totally debased.

They're backed only by the American dream, and not by gold, silver, or any other commodity. The fact that the U.S. dollar has declined 30% in recent years is only the most visible sign of this debasement.

This recent raid will hardly end the hunger of Americans to possess "real money." But it may well spell the end of NORFED.

Fortunately, there are many other ways to purchase gold and silver. U.S. gold and silver eagles, produced by the U.S. mint, are unquestionably legal to buy and sell. If you don't want to take physical possession of precious metals, you can purchase them through organizations such as GoldMoney or the Perth Mint Certificate program.

Just don't make any claim that real money backed by gold or silver is legal tender for any debt. Otherwise, the Feds might shut you down, too.

MARK NESTMANN, Privacy Expert & President,
The Nestmann Group
www.nestmann.com

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THE SOVEREIGN SOCIETY OFFSHORE A-LETTER
Erika Nolan, Executive Director • Mike Burnick, Senior Editor
Kathlyn Von Rohr, Managing Editor • Bob Bauman, Legal Counsel
Eric Roseman, Investment Director • Sean Hyman , Currency Director
Joel Browner, E-Commerce Marketing Director

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