The Fed’s reluctance to change its super easy monetary policy put the US dollar into new low, not seen since early 2008.

Long term trend:

With the developed world expected to grow much slower than the developing world, and also due to increased globalization of US firms, during the past decade, big US firms have shifted more jobs abroad than the jobs they have created at home.

read the Journal article here.

According to Dr. Yardeni of Yardeni Research,

Gold is widely perceived to be a hedge against inflation. Actually, it is a hedge against reckless monetary and fiscal policies. One of the best measures of global monetary policy is non-gold international reserves held by central banks. The monthly data are compiled by the IMF. The price of gold seems to track the parabolic trajectory of the reserves data relatively well. Over the past decade, the price of gold has soared 470% from a low of $255.95 an ounce on April 2, 2001 to $1,459.10 this morning. Over this period through January, reserves held by central banks soared 376%, much faster than the 121% increase during the previous 10-year period, when the price of gold fell 28.4%.

(click to enlarge, graph courtesy of Dr. Yardeni)

With the announcement of China's GDP number in Q1, its foreign exchange reserves officially passed the $3 trillion mark – gigantic, unprecedented. And around 70% of the total is in US dollar.  Both numbers need to come down.

China is trying hard to internationalize its currency – Yuan. In the ongoing BRICS meeting in Sanya, Hainan, the heads of the five countries signed a new pact, according to WSJ,

Bob Mundell.

The first-quarter earnings look to be another impressive one. The number of profit-warning announcements over the past three months is near a decade low. Analysts expect S&P 500 earnings to rise 12% from a year ago, and that may prove conservative.

So why isn’t the US economy accelerating?  According to WSJ analysis, most growth of corp. earnings came from overseas, as US companies take advantage of faster economic growth in emerging markets by investing abroad.

Let’s call this dark side of strong corporate earnings.

Growth may firm up later this year. But the relative weakness with each quarter raises a question: Why isn’t the U.S. economy accelerating, especially with the corporate sector in such good shape?

Perhaps because corporate earnings aren’t being driven by strength in the U.S., but to some degree by its weakness. Companies have shifted production and sourcing overseas to cut costs and to tap demand in faster expanding markets. Capital spending in emerging markets like China and India has more than doubled in the past decade, and surpassed developed markets last year for the first time, HSBC estimates.

That is fostering growth abroad but undercutting prospects in the U.S. The nation’s factors of production, such as factories and equipment, or capital stock, actually shrank in 2009 for the first time in postwar history. Business investment did rebound last year, but the 15% increase, which should have generated 380,000 jobs on average a month, created only 78,000, notes UniCredit economist Harm Bandholz. The rebound appears largely to have been maintenance-driven, and investment has leveled off since.

The shifting of investment overseas and erosion of the nation’s capital stock are no small matter. They imply a lower potential growth rate for the U.S. and higher structural unemployment. As that reality dawns, the corporate sector’s strength may start to lose its luster.

According to WSJ, Brazil appears to be waving the white flag in the currency war.  After months of tough talk to speculators and other governments driving up the Brazilian real, Finance Minister Guido Mantega seems resigned to the fact that there is little he can do to contain the currency's meteoric rise.

The currency climbed through a key barrier of 1.60 per dollar Thursday, a day after Mr. Mantega unveiled the latest in a string of controls designed to slow the real's climb. It was trading at 1.59 to the dollar late in the day, up more than 40% since late 2008.

Brazil imposed a tax on capital inflow last year.  But that seemed not working very well. Capital continues to flow in due to the very large interest rate differential and a robust economic growth partially driven by the commodity boom worldwide.

When one country raises interest rate to contain inflation, while capital control is absent, it simply invites more capital inflows, which could drive up inflation further.  This is why Brazil is giving up.

IMF has long been an opponent of capital controls.  But it reversed its position recently and is more willing to consider capital control as a policy option.