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It’s tough being a patriotic American these days with all the media sensationalism putting the good ‘ole USA down.
IN THE CONFUSING WORLD OF CURRENCY MARKETS, THINGS ARE NOT ALWAYS AS THEY APPEAR.
The U.S. dollar fell to an all-time low ON Wednesday and very little chat has spread over our local forums.
IS THE FALLING $ OLD NEWS NOT WORTHY OF SENSATIONALISM ?
Supposedly, it was pushed over the edge by some off-the-cuff comments from Chinese officials. The dollar’s plunge started when some Chinese central bank officials were quoted suggesting China would be diversifying its $1.4 trillion in foreign currency reserves, moving away from dollar holdings.
Those Chinese officials shouldn’t have been taken seriously because they have little power:
IT’S LIKE THE MAYOR OF SAN JOSE COMMENTING ABOUT THE WAR IN IRAQ.
The dollar represents a single G8 economy. The euro represents three G8 economies, and could be four if Britain adopted the euro. America’s also halfway across the world from the Middle East, whereas Europe’s only a puddle jump. How long do you think it will take commodities markets to realize this?
While a dollar in the dumps might look like a stain on U.S. pride and prestige, it might also be good news for American consumers, workers, and companies. Being a patriotic American these days is:
LIKE BEING BETWEEN A DOG AND A FIRE HYDRANT
The dollar has been hitting record lows against the euro for years, but those records aren’t very surprising because the euro is a new kid on the block, only created in 1999. On Nov. 7, the dollar hit a true milestone when it surpassed the spring of 1995 low against the Deutsche Mark, the equivalent of about $1.455 to $1.457
On Nov. 7 the euro hit a high of $1.473 before pulling back a bit by the end of the day. At the end of the day, the euro was up 0.57%, to $1.4641.
TALK IS CHEAP AND WE MUST LOOK BEYOND THE MEDIA TO UNDERSTAND WHAT’S HAPPENING GLOBALLY.
Many already assumed China and other Asian central banks were diversifying their holdings, but they’re not necessarily selling dollars, just buying extra euros. It’s a question of psychology. The Chinese comments “gave market participants an excuse to do what they wanted to do.
Standard & Poor’s European economist Jean-Michel Six, “There is a bit of political posturing here.” China is pushing back on U.S. demands that it revalue its currency.
One Chinese official was quoted saying the dollar is “losing its status as the world currency.” There’s not a lot of evidence for this contention.
Despite the drop in the dollar’s value, commodities such as oil and wheat are still traded all around the world in U.S. currency. U.S. Treasury bills are still a popular safe haven for investors all over the world. Treasury prices actually rose on Nov. 7.
SO WHY IS THE US $ CONSISTENTLY FALLING ?
Look at economic fundamentals. Money moves across borders, chasing extra returns. So currencies tend to rise when the markets expect strong economic growth and to fall when a slowdown may be coming.
This economic strength or weakness is reflected in yields on bonds and interest rates. Right now, the bond markets seem to expect many more interest rate cuts from the Federal Reserve in the next several months. That means the markets also are expecting a deep slowdown in the U.S. So it’s no surprise that investors are moving money out of dollars and into other currencies that will give them better returns.
By Jessica Hupp
It’s no secret that the dollar is on a downward spiral. Its value is dropping, and the Fed isn’t doing a whole lot to change that. As a result, a number of countries are considering a shift away from the dollar to preserve their assets. These are seven of the countries currently considering a move from the dollar, and how they’ll have an effect on its value and the US economy.
“1. Saudi Arabia: The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve. This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking “appropriate measures” to protect itself from letting the dollar cause problems for their own economy. They’re concerned about the threat of inflation and don’t want to deal with “recessionary conditions” in the US. Hans Redeker of BNP Paribas believes this creates a “very dangerous situation for the dollar,” as Saudi Arabia alone has management of $800 billion. Experts fear that a break from the dollar in Saudi Arabia could set off a “stampede” from the dollar in the Middle East, a region that manages $3,500 billion.
2. South Korea: In 2005, Korea announced its intention to shift its investments to currencies of countries other than the US. Although they’re simply making plans to diversify for the future, that doesn’t mean a large dollar drop isn’t in the works. There are whispers that the Bank of Korea is planning on selling $1 billion US bonds in the near future, after a $100 million sale this past August.
3. China: After already dropping the dollar peg in 2005, China has more trouble up its sleeve. Currently, China is threatening a “nuclear option” of huge dollar liquidation in response to possible trade sanctions intended to force a yuan revaluation. Although China “doesn’t want any undesirable phenomenon in the global financial order,” their large sum of US dollars does serve as a “bargaining chip.” As we’ve noted in the past, China has the power to take the wind out of the dollar.
4. Venezuela: Venezuela holds little loyalty to the dollar. In fact, they’ve shown overt disapproval, choosing to establish barter deals for oil. These barter deals, established under Hugo Chavez, allow Venezuela to trade oil with 12 Latin American countries and Cuba without using the dollar, shorting the US its usual subsidy. Chavez is not shy about this decision, and has publicly encouraged others to adopt similar arrangements. In 2000, Chavez recommended to OPEC that they “take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers,” or in other words, stop using the dollar, or even the euro, for oil transactions. In September, Chavez instructed Venezuela’s state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies in order to mitigate risk.
5. Sudan: Sudan is, once again, planning to convert its dollar holdings to the euro and other currencies. Additionally, they’ve recommended to commercial banks, government departments, and private businesses to do the same. In 1997, the Central Bank of Sudan made a similar recommendation in reaction to US sactions from former President Clinton, but the implementation failed. This time around, 31 Sudanese companies have become subject to sanctions, preventing them from doing trade or financial transactions with the US. Officially, the sanctions are reported to have little effect, but there are indications that the economy is suffering due to these restrictions. A decision to move Sudan away from the dollar is intended to allow the country to work around these sanctions as well as any implemented in the future. However, a Khartoum committee recently concluded that proposals for a reduced dependence on the dollar are “not feasible.” Regardless, it is clear that Sudan’s intent is to attempt a break from the dollar in the future.
6. Iran: Iran is perhaps the most likely candidate for an imminent abandonment of the dollar. Recently, Iran requested that its shipments to Japan be traded for yen instead of dollars. Further, Iran has plans in the works to create an open commodity exchange called the Iran Oil Bourse. This exchange would make it possible to trade oil and gas in non-dollar currencies, the euro in particular. Athough the oil bourse has missed at least three of its announced opening dates, it serves to make clear Iran’s intentions for the dollar. As of October 2007, Iran receives non-dollar currencies for 85% of its oil exports, and has plans to move the remaining 15% to currencies like the United Arab Emirates dirham.
7. Russia: Iran is not alone in its desire to establish an alternative to trading oil and other commodities in dollars. In 2006, Russian President Vladmir Putin expressed interest in establishing a Russian stock exchange which would allow “oil, gas, and other goods to be paid for in Rubles.” Russia’s intentions are no secret–in the past, they’ve made it clear that they’re wary of holding too many dollar reserves. In 2004, Russian central bank First Deputy Chairmain Alexei Ulyukayev remarked, “Most of our reserves are in dollars, and that’s a cause for concern.” He went on to explain that, after considering the dollar’s rate against the euro, Russia is “discussing the possibility of changing the reserve structure.” Then in 2005, Russia put an end to its dollar peg, opting instead to move towards a euro alignment. They’ve discussed pricing oil in euros, a move that could provide a large shift away from the dollar and towards the euro, as Russia is the world’s second-largest oil exporter.
What does this all mean?
Countries are growing weary of losing money on the falling dollar. Many of them want to protect their financial interests, and a number of them want to end the US oversight that comes with using the dollar. Although it’s not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble.
Obviously, an abandonment of the dollar is bad news for the currency. Simply put, as demand lessens, its value drops. Additionally, the revenue generated from the use of the dollar will be sorely missed if it’s lost. The dollar’s status as a cheaply-produced US export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.
The falling dollar might not be hugley interesting to the average worker be in the States. After all, it is just one symptom among many of an economy on the edge of a steep slope. The overall message remains the same; we are headed for a recession.
The worker bees will have to make do with even less once in the recession. They will do that and they will do it in relative silence. They will still vote for republicans or democrats, honor their flag and continue to believe in the nonsensical american dream, unaware that the main ingredients to that dream, greed and materialism, have been the cause of the downfall. And while these things are cyclical, this upcoming recession seems to have a more ominous and permanent message for the U.S. and the rest of the world.
I hope my cozy litle Costa Rican nest will serve as some protection from the dog as he raises his hind leg…..:-)
Currency speculation is a wonderful thing. You can find an equal number of opinions on both sides of every issue — each argued equally cogently.
But the facts are the facts. It is no longer true that the US dollar is the only international curerency for oil purchases. A few years ago, a few countries started to use EUROs as the currency of choice for buying oil. WHile the US dollar was the only currency used for international purchases, its value was propped up by this automatic demand. As this automatic demand declines, other factors will weigh more heavily on the value of the dollar, such as the perrenial US trade deficit. You cannot run a country consistently spending more than you earn without paying the price some time.
But the slumping dollar is curing the problem that contributed to the slump. The trade gap is narrowing as US exports become more attractively priced.
Many speculators have gone broke betting against the US dollar. I can think of at least two recent times: in the early nineties, and back in the eighties when Japan seemed poised to buy all of New York. Remember? The dollar recovered well each time, but it took a few years.
The point is not to worry too much about the eventual value of the dollar, but also to be aware that in the short term, Euros are a good currency to hold as well. Don’t bet on one or the other currency; hold both currencies. Chinese Yuan are too much controlled by the Chinese government, so that way lies trouble for diversifiers.
Now, let’s see …. maybe we should short Colones and go long on Yen? ^_^
posted by Len Cranky
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