Dollar Death By 1000 Paper Cuts (Or trillions, in this case)

Zhu Min, Deputy Governor of the Chinese Central Bank, issued comments at an economic forum in Beijing yesterday in which he stated that the U.S. dollar is set up to go lower and that foreign buyers will become a lot more reluctant to buy more U.S. Treasury bonds:

“When the U.S. has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the dollar will continue to weaken.”

He also said that the U.S. can no longer assume that foreign countries will continue to fund its massive spending deficits.  Here's the Bloomberg news link:  Dollar Set To Weaken

Notwithstanding the current miniscule trading bounce in the dollar, it's probably worth paying attention to statements about the U.S. dollar and U.S. spending deficits which eminate from Chinese officials, as they are the largest holder of U.S. Treasury bonds.   Might also be worth paying attention to the recent disclosure from Pimco, which revealed that its Total Rate of Return Fund unloaded a massive amount of U.S. Treasury and agency debt, the latter clearly helped by the Fed's massive purchases.

Don't assume that a big spike in interest rates in the Treasury market - caused by funds like Pimco dumping and much higher yields required by foreign buyers - means a lower price of gold.  Au contraire, assume that higher interest rates in this context imply much higher inflation expectations from the market, as a result of the weakening of the dollar.

Higher interest rates will also destroy any lingering fantasies of a housing market recovery.  Will the Fed let the market takes it natural course and stop printing money?  Or will Bernanke, with reappointment confirmation safely in hand from the full Senate in January, re-up the Fed's money printing machine (Quantitative Easing) in order to purchase the 100's of billions in Treasuries necessary to keep interests down?  I am betting heavily on the latter and it sounds like the Chinese are as well.