Wednesday :: Apr 19, 2006

Is The End Time For US Dollar Hegemony Upon Us?


by pessimist

It sure looks that way! Many people [especially Rep. Ron Paul (R-TX)] have been warning us that this day would come, and it looks like it's here:


U.S. dollar continues slide
Apr 19, 2006

The U.S. dollar kept on dropping this morning and by 11:00 a.m. it was trading at 1.1375 against the Canadian dollar. U.S. President George W. Bush mentioned yesterday that he is going to keep his options open to keep Iran from developing nuclear weapons.
His comments have shaken the confidence of foreign investors
on the prospects of the U.S. economy and the country's political stability
and boosted the appeal of gold.

Confidence is fleeting when trust of security is lacking. The focus of the world's investors isn't in the dollar like it was before Bu$hCo took power, but in another currency:


U.S. dollar bears growling
by ROMA LUCIW
Globe and Mail
19 April 06

Economist Martin Murenbeeld at Victoria-based M. Murenbeeld & Associates Inc. said that what happens to the Chinese currency will be key for the future of the U.S. dollar. The bears are increasingly circling the U.S. dollar, with a growing chorus forecasting the currency is set for a further drop. On Thursday, Chinese President Hu Jintao is set to meet U.S. President George W. Bush in Washington. No one knows whether Mr. Hu will unveil any concessions on the controversial peg of China' currency to the U.S. dollar, which critics say keeps the yuan anywhere from 20 to 40 per cent undervalued.
"Next 24 to 48 hours critical for a breakdown for the U.S. dollar,"
Andrew Busch, global foreign exchange strategist for BMO Nesbitt Burns Inc.,
said in a Wednesday report.

This is the sort of financial information that makes investors leery of the dollar:

Word that foreigners bought a net $86.9-billion (U.S.) in U.S. securities February should have pushed the greenback sky-high on Monday, according to U.S. trader Dennis Gartman. That the U.S. dollar turned around and fell is a warning sign that the market is in big-time trouble. He believes the greenback will extend its recent losses and advised investors to sell the currency.
The data is key because
the United States depends on overseas investors to finance its large trade deficit,
and any pullback could lead to a weaker dollar, higher interest rates and crimp economic growth.

So what happened Monday that changed the usual response to the report?

Dollar selling was prompted by reports in Chinese state-owned newspapers Monday that quoted Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress, as saying China should reduce the quantity of U.S. Treasurys that it purchases.

There are other troubling signs for the U.S. dollar. Two weeks ago:

Dollar falls as Mideast banks mull switch to euro reserves

In a Dow Jones Newswires survey of 20 leading foreign exchange dealers, the dollar was seen ending the year considerably lower versus the euro and the yen. The governor of Qatar's central bank, Abdulla Bin Khaled al-Attiyah, said up to 40 percent of its foreign exchange reserves could be held in euros. [T]he head of the United Arab Emirates' central bank said a decision on whether to shift 10 percent of its estimated $23 billion worth of dollar reserves into better-performing euros from dollars was postponed until next month.

The 'disloyalty' of foreign economies isn't limited to Asia and the Gulf:


FOREX-Dollar falls vs Swiss franc on Iran nuclear news
11 April 2006
By Gertrude Chavez-Dreyfuss

NEW YORK, April 11 (Reuters) - With the Fed's dollar-supportive credit tightening cycle expected to end soon, structural imbalances such as the U.S. trade gap and massive amounts of foreign capital inflows needed to plug it could weigh more heavily on the dollar. The dollar slipped against the safe-haven Swiss franc on Tuesday on geopolitical tensions ...

"Some news came out of Iran and that gave the Swiss franc a bit of a boost. That's a little dollar-negative and a little Swiss franc-positive on whatever form of safe-haven status the currency still has," said Brian Dolan, director of currency research at Gain Capital in Bedminster, New Jersey.

Clearly, there is little wiggle room left. Indications are that the long-forecast economic avalanche is underway:


'D' is for diversification
Tuesday, April 18 - 2006

While sentiment had stabilised significantly, the recent correction in the Saudi stock market, which lost 15% in just two days, highlights the vulnerabilities still present in some markets - although the resilience in other markets has been quite surprising.
The question now is where is the smart money going?
There is ... a lot of talk of investors looking for alternative stock markets to invest in. The performance, and possible overvaluation, of regional and nonregional stock markets, such as the Indian stock market, gives credence to this view.

The second area of interest has been FX reserve diversification, particularly in the past couple of weeks. It started with the UAE central bank indicating that it may raise its EUR holdings to 10% from 2% of its total FX portfolio. Then other central banks suggested that they too might consider increasing the weight of EUR holdings in their portfolios.

On the issue of trade and investment, recent developments have encouraged the region to reduce its reliance on improved trade ties with the US. [T]he diversification of trade both geographically and away from a commodity that is priced in USDs would suggest that the peg to the USD will make less sense economically going forward.

This is clearly encouraging the already emerging trend of countries in the region diversifying their trade and investment ties to other countries or regions.
The final area of diversification is the desirability or need for countries to diversify their economies away from an over-reliance on the hydrocarbon sector.

The interesting thing to note is that all of these areas of diversification are consistent with plans for greater currency flexibility. The development of local currency bond markets would increase the incentive to borrow locally rather than expose themselves to the currency risk of borrowing in international capital markets. This would also have the benefit of helping to develop the local financial systems in the region.

FX diversification makes sense from a portfolio management point of view, but especially in the case of a floating currency, especially were this to follow a trade-weighted basket mechanism that we have been suggesting for some time now. (see, for example, Middle East Focus: The case for currency reform - December 2005)

That said, at the margin, there are indications of a desire to not follow the Federal Reserve automatically in its hiking cycle and have independent monetary policy settings to a minor degree. However, it does indicate there are circumstances under which alternative policy settings would be considered.

As the above developments become more pronounced,
these situations are only likely to increase in regularity and severity
...and thus a removal of the USD pegs become inevitable.

I hope you Red Staters are happy that the end times you wanted are going to come soon. They just aren't going to be the exact version you wanted. You are going to have to stick around and suffer the earthly tribulation your votes (or lack thereof) helped to bring about. There's no getting around it - you already had your Rapture in the form of King George's 'tax relief'.


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