So – We saw yesterday that things are not as rosy in Euro land as people thought, I even wrote about it too, but it gets a bit worse.  As it happens the German Economy shrank by again the first quarter of 2009 by 3.8% (6.7% for the year) which is the largest decline since the two Germany’s, East and West, were unified in 1990.  What this says is that things are still getting worse.  To top off that bad news, a German Finance official made a comment about the stability of German banks.  He was quoted as saying “the toxic assets will blow up like a grenade” although later he denied saying that — one listen to the audio that was played on the radio (BBC, of course) confirms that he did not say that.  What he did say was “…the bad assets that the banks have on hand are liable to explode like a grenade if it is not addressed in a more aggressive manner.”  Sounds the same to me.

In the US, the stock market rallied after consumer confidence numbers rose reflecting that American consumers are optimistic about the future of their shopping.  Who wouldn’t be?  Have you seen the sales that are going on in the few stores left in America’s big, huge iconic malls?  Traders get so excited over the smallest of things.  They pumped up the stocks because of consumer confidence but neglected the more alarming data of housing and unemployment.  Yesterday also saw the release of housing data which suggests that the price drop in America’s real estate market has not neared a bottom yet – and the forecast from the real estate community is that it won’t any time soon.

Fact is, with the Federal money given out during the stimulus phase, or as I like to call it, hand-out at the expense of taxpayer phase, builders are incentivized to just build. The numbers released yesterday showed that there is  a big discrepancy between demand and available units being built.  The market is being supplied with 600,000 plus new units – but the demand barely covers 300,000 of them.  This alone does not take into consideration what is already on the market, or what is being foreclosed on.  This was a housing start data and it showed that the stimulus is only stimulating the builders while the overflow would serve to further lower prices in the communities they are being built in.

Take San Diego County for example; in Oceanside, one of the wealthier, more exclusive areas, there is a house that was built three years ago – beautiful house – 4000 square feet inside – a mini-mansion by many standards which was sold for 1.75 Million Dollars in 2006.  The bank took possession of the house and it is now on the market for 600,000 Dollars – almost 1/3rd of the original price.

So, when a consumer sees those prices they get excited and feel optimistic – “I can own that once unreachable house for so much less” – and they tell the pollster who calls them about how they feel and they say, “I feel great, I feel like things are picking up” – but talk to the banks about their toxic assets like the 1.7 million dollar house they are still trying to unload for 600,000 and the picture is completely different.

Those of you reading my Forex Online blogs know better – and if the rest of the trading community could see it – well, perhaps you won’t see these wild swings over nothing.

The British government was rocked last week, first from the scandal involving the insane spending done by their parliament members and then by the warning from Standard and Poor’s that their credit rating – or should we say debt rating – is in peril of being lowered due to huge budget deficits and a rising national debt not seen since World War 2.  Did the Sterling fall though? No, it did not – at least not as much as one would think that a “AAA” rated country would fall after hearing that they will soon be subject to higher interest rates and unfavorable terms that comes with anything less than a “AAA” rating.  What did happen was quite fascinating, and it was something that I have been saying here for months. The US Dollar collapsed on the news out of England.

Why? You might ask would the currency of a country across an ocean fall on bad news out of the British Isle’s.  The answer is quite simple, Forex traders and investors know that the US is next on the chopping block.  Although I firmly believe that they should be first based on their crazy debt to income ratio – they are running at a 12 Trillion Dollar deficit carrying a 1.5 Trillion dollar debt and GDP is expected to fall this year – the Dollar enjoys the privilege of being the Dollar, and thus it gets afforded a little more latitude when it comes to these matters.

But the real reason why the US was not first on this list was political and economic in nature.  Lower the sovereign debt of the US and countries holding the bonds suffer.  As the US will be faced with higher borrowing rates, and will not be afforded the right to offer so much debt and will be regulated as to the terms (10 year, 20 year 30 year), the value of the currency will fall and thus make the value of the debt already out there worth less.  This will have a huge impact on the world economy and is probably one of the reasons why China is pondering accepting the Brazilian Real in trade over the US Dollar.

But one last thing on this, it is ironic though that while this might hurt the rest of the world, it will help the US get out of the mess quicker.  By deflating the currency it means that the US has to pay less in order to repay a debt.  For example, if China is holding $10 in bonds from 1999 those bonds are still worth $10 today – plus interest, however the value of the dollar is lower than it was in 1999 and so the payments that the US makes will be worth less than they were only a few months ago.  Forex online blogsters are buzzing about this – and all those trading in the dollar should be aware that this is coming.  Don’t say you were not warned.

The seeds are being planted for the removal of the dollar as a reserve or so it seems this fine Tuesday morning.  I woke up to read in the Financial Times that both Brazil and China will seek to use their own currencies in trade rather than the popular US Dollar.

What thismeans is that instead of China buying goods from San Paolo using the greenback, the Brazilians will accept the Renminbi and when purchasing goods from Beijing, the Chinese will accept the Real.  This has huge implications and I will explain why.

Although this is a small deal between an economic mammoth and a moderate sized country, it opens the doors for other countries to do the same – it sets the precedent.  And while it is not necessarily a Chinese or Brazilian declaration that they are ditching the dollar as a reserve, it allows them to begin scaling down their reserves as it is not needed for trade anymore.

The Chinese have figured out a smart way to do this, without sticking a huge middle finger up at the US, and without making tsunami sized waves. This will be slow process, a backdoor to redefining the global monetary system without anyone seeing it happen before it is too late.

The US should have expected this, they are 12 Trillion Dollars in the hole and are only worth 14 trillion annually – a number that is certain to decline this year as a result of the slowdown.  Being that there are only 800 Billion actual dollars in circulation (not including the fake ones that North Korea has been printing), this puts the US in a position similar to Rome eighteen hudred years ago – a dominant power in the world that those in need turn to for help yet on the inside, they are collapsing financially and are actually the ones in dire need of help.

We have never seen this before so it is hard to derive a historical reference that could give us insight as to how this will play out.  But my Forex Online readers and Traders, I refer you to Zimbabwe as an example of what could happen if the proverbial crap hits the fan in the US.

Trade smart – and watch the Dollar today.