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December 23,2009
Frank Beck On Currencies
The dollar stumbles through 2010 as sovereign debt downgrades hit close to home.

The Big Trend

Excessive government spending causes foreigners and even our own citizens to continue to shun the dollar, which will continue to decline through 2010. China will begin to let the yuan appreciate, probably with an informal peg to a basket of competitive exporters. The yuan~s appreciation will export inflation to the U.S., not only in the obvious end-products, but also in the form of parts that are manufactured in China and used in assembled products here in the U.S.

The Unconventional Wisdom

Most economists expect inflation to remain flat due to high unemployment. Unemployment will likely remain around 10%, but it is normally around 5%. The dollar~s further devaluation (which by definition, is inflation) coupled with China~s appreciating yuan, will cause inflation here at home, long before most believe.

The Misplaced Assumption

The general assumption for interest rates is that they will remain low throughout 2010, with the Fed raising around mid-year. I expect the Fed to keep the funds rate near 0% through the end of the year and will likely use every arrow in his quiver to keep long-term rates low, at least until the end of April when the current "first-time" home buyer tax credit expires. Upon exhausting what can be done by the Fed, I expect the yield curve to steepen, with the 10- & 30-year Treasury yields rising sharply. Expect the 30-year yield to close above 6.5%.

The Watch List

Watch gold to rise above $1,500 during 2010. Miners, food and clean-water companies will have a good year. Especially companies selling products to the Chinese government or to the growing Chinese middle-class, regardless of the company~s domicile. People who stand to have a good year will likely consist mostly of conservative candidates come next November.

The Bold Prediction

Great Britain~s government debt, followed by U.S. Treasuries, will lose their triple-A status. Heavy deficit spending by Washington will continue to drive the dollar down as more countries and investors become concerned that the U.S. will not be able to pay debts through taxation or budget surpluses. As Treasury rates begin to rise, so will the deficit, both through the government~s overspending and due to the increased interest rate expense on current debt. The expectation, first with investors and then with rating agencies, will become one where the U.S. turns on the printing press. Expect AA+ by end of year.

Frank Beck is senior investment analyst for Capital Financial Group and Pro Player Investing, in Austin, Texas, and Santa Barbara, Calif. He may be reached at Frank@FrankBeck.com

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