Trouble Ahead For The U.S. Dollar? [PowerShares DB US Dollar Index Bullish, SPDR Gold Trust (ETF)]

Plagued by an elevated unemployment of 11.5% and troubling indicators signaling disinflation, the austerity calls are being hushed by much louder cries for stimulus.

With the most recent figures for European growth at 0.3%, its lowest level in five years, the European Central Bank (ECB) can’t risk having this bout with disinflation morph into a full-on debt deflation trap.

Deflation would add to the real value of debt, hurting borrowers and raising the possibility of a credit crunch. This is the last thing the region needs when countries with the most troubled banks, such as Portugal, Ireland, Greece, and Spain, are beginning to find buyers of their debt outside of the International Monetary Fund (IMF) and European Union (EU) life-support lending facilities.

Inflation would also help bring current accounts in the Eurozone periphery into balance, a factor that has been acting as a headwind to a substantial recovery in the region.

ECB President Mario Draghi surprised Eurozone observers last week when he announced several rate cuts to the central bank’s lending and deposit facilities and a plan to buy non-financial asset-backed securities to the tune of 500 billion euros over three years.

He also suggested that a large-scale sovereign bond-buying program, or European quantitative easing, was not far off when he said “Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate.”

This will all contribute to a weakening of the euro, and already has helped to prop the dollar up.

But the euro and the pound aren’t the only currencies in a slump…

“Abenomics” Weakens the Japanese Yen

The Japanese yen has fallen 1.1% on the year, which comes as no surprise given its strict adherence to the so-called “Abenomic” policies that Japanese Prime Minister Shinzo Abe has pursued since December 2012.

“Abenomics” is made up of three main elements called “arrows” that include monetary easing, flexible fiscal policy, and structural reform. Since its inception in 2012, the yen has fallen more than 20%.

The first two arrows are the main culprits behind the yen’s plunge.

The first, which entailed monetary policy changes in the Bank of Japan, was announced in April 2013 and known officially as “quantitative and qualitative monetary easing.” It looked to increase the monetary base by 60 to 70 trillion yen a year. The program also included an annual purchase of long-term Japanese government bonds to the tune of 50 trillion yen a year to put downward pressure on interest rates.

This was accompanied by the second arrow, which addressed fiscal policy, and amounted to 10.3 trillion yen, or 1.4% of Japanese GDP, in debt-financed stimulus spending.

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