How crazy it is
Bloomberg reports that the trend towards diversification away from the dollar has accelerated rather dramatically in recent months as foreign governments act on their understanding of the government’s imprudent spending plans and unfinanceable deficits:
Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two-quarter rout in almost two decades. Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion…Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June…That’s the highest percentage in any quarter with more than an $80 billion increase.
World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991…
The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999. Englander concluded in a report that the trend “accelerated” in the third quarter. He said in an interview that “for the next couple of months, the forces are still in place” for continued diversification. America’s currency has been under siege as the Treasury sells a record amount of debt to finance a budget deficit that totaled $1.4 trillion in fiscal 2009…
“The diversification out of the dollar will accelerate,” said Fabrizio Fiorini, a money manager who helps oversee $12 billion at Aletti Gestielle SGR SpA in Milan. “People are buying the euro not because they want that currency, but because they want to get rid of the dollar. In the long run, the U.S. will not be the same powerful country that it once was.”
Some might draw the conclusion that this is the administration’s plan — since controlling the crazy and unfinanceable deficits is certainly within the power of government to do.
October 13th, 2009 at 11:16 am
I worry when someone with a vested interest in the strength of the dollar comments on it — not a lot different from asking a college football coach what he thinks of the way the teams are doing during the season. And whenever I hear people commenting on the strength of the dollar in international currency markets I think to myself how large a share we have of the total world economy and I’m reminded of Howard Hughes father’s comment when asked about his son’s losing his first million: “yeah, at that rate he’ll be broke in 215 years.”
The dollar is a weak financial instrument — except when compared to all other currencies (including World Bank SDRs). And truth to tell, who really cares if international markets decide to go to another currency, or basket of currencies, as a basis for trade? The US does not gain any benefit from the use of the dollar to guarantee the sale of oil or gold or bauxite or whatever. The markets themselves benefit from such a foundation, and George Soros benefits if the dollar tanks, but for the most part the rest of us are unaffected by the exchange rate of the dollar against other currencies unless we’re buying a lot of foreign products.
OTOH, the current deficit situation is another matter and an altogether troubling one. And the chart above showing USG expenditures as a percentage of GDP is really troubling. We’re almost at WWII levels and most of it is going to buy votes for sitting politicians. Really troubling. F
October 13th, 2009 at 1:45 pm
I echo F’s concerns. The consumer market in the USA is estimated to be $10 Trillion. In Europe, their combined consumer market is estimated to be $9 Trillion. China is estimated to be $1.6 Trillion.
Let’s do the math. If the USA and the EU saw a 10% contraction in their consumer markets, the Chinese market would have to more than double in order to sop up the loss of consumer markets in the USA and the EU.
Why anyone would want to buy Yen when Japan is printing like crazy (and the game is to pass newly printed currency to the World Bank for their SDRs) is beyond me. If you were China, would you game the yen short term? Would Japan holler because you are driving up their currency at the time they are trying to print their way out of a mess? Would Japan smile because the Chinese are buying “soon to be worthless” Yen with “soon to be worthless but later than yen” dollars?
Once the World Bank is sitting on all these newly printed currencies (and the contributing countries/economies are printing to beat the band) what do they do? Do they sell the weaker currencies when the basket index rotates out of the weaker currencies? Do the countries with the weaker currencies accept the associated interest rate risk when the World Bank does not value their currency enough to hold it? Do their finance ministers get drunk and then blow their brains out?
October 14th, 2009 at 1:30 am
Tuesday morning links…
Afghan Pop. Watch the Afghan Star trailer.
From John yesterday re Columbus Day:
Speaking of Columbus, the Associated Press finds that the boldest explorer in world history did not have quite the same sensibilities as a liberal 21st century schoolm…