When does it stop?

We don’t see where the end lies. The longest-running lame duck, Treasury Secretary Snow, was asked to leave (as long rumored) and someone new will be brought in to deliver a different message. But there’s no evidence a new team can reverse the damage — and who has the stature to pull it off?

When Merrill Lynch issued a forecast that 1.5000 in the euro-U.S. dollar rate was a real possibility, the market initially poked fun at the idea. But the U.S. embrace of a weaker dollar is serious business, and consider that currencies always overshoot. It indicates a possible inverted head-and shoulders bottom, which is a usually reliable pattern. There is often a bounce back to the line marking the highest point of the formation, in this case 1.2570, but then a resumption of the bullish euro/bearish dollar move could easily take the pair to the previous high of 1.3850 and beyond. It shows the current condition in terms of the dollar index, which shows a head-and-shoulders top.

Possibly nothing much will come of all this. International investors will continue to prefer the U.S. markets for their size, variety, transparency, etc., and we will not see much additional reserve diversification, if any.

It’s too soon to call it a crisis. It becomes a crisis when the Treasury has to add another one to two percent to sell its T-bills and notes at auction. That day may be closer than we think. Then the run-up in commodity and gold prices will look sensible instead of the bubble it appears to be today.