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Reserve Currency – Is There Any ?

April 19, 2010 By Chuck

Guest post by oilprice.com

The Search for a Reserve Currency

Currency, like all forms of abstract value, is based on trust. And trust itself is based – except among the most naïve – on experience, and the repetitive demonstration of fidelity, whether positive or negative. At present, the US dollar, which had experienced a gradual rise during the 20th Century to the position gained well into the Cold War of being the trading world’s reserve currency. It had the mass, in terms of volumes of available currency; it had the backing of an indisputably wealthy national asset base to move away from the gold standard; it had stable governmental backing.

All of that is evaporating. Not, in absolute terms, as far as the mass of currency available, because that has dramatically expanded in recent years, and particularly during the past year of the Administration of Pres. Barack Obama. Not in the underlying asset valuation of the US economy, but it has begun to erode as the productive capability of the US to extract that value diminishes due to excess governmental interference and anti-business practices. It is far to say that other countries, from Nigeria to Russia, have vast untapped underlying asset value. That they did not create global reserve currencies from their naira and ruble was due to governance failures.

However, as we are witnessing, good governance as an essential component of currency value and the trust in that currency, can transform overnight, just as we witnessed the post-World War II collapse of sterling, and, now, the shakiness of trust in the US dollar (despite the reality that, at $14.2-trillion in value in 2008, is the world’s largest). The age of the US dollar as the global reserve currency is not yet over, but it is threatened, and the trend toward a flight from the dollar (despite occasional returns to it) is evident. At present, however, the dollar is shored up because in many respects there is nothing of its stature ready to replace it. This leads to the essential question:

Are we entering a period in which we may have no global reserve currency?

[Read more...]

Filed Under: Market Updates, currency Tagged With:

Cross Your Fingers – US Dollar

November 25, 2009 By Chuck

As has been stated numerous times on this site everything comes down to the currency markets. The US stock market is neither trading on current nor future fundamentals. It is simply moving in reaction to events in the currency markets.This has been the case for at least 3 months now. First as a safety trade, and now as a carry trade that has gotten out of control.

At the beginning and throughout much of the financial crisis the US dollar was a short term ‘safety trade’, or in other words a risk aversion parking spot. But, as the value of the US dollar continued to deteriorate it became a carry trade (borrow US dollars cheaply to engage higher risk/cost transactions) much like the Japanese Yen did in 2007 and early 2008.

Carry trades never end well, and with the worlds global currency now being nothing more than a vehicle to borrow cheaply it will (not if) lead to a disastrous outcome if the US Government does not take an active role in stabilizing the currency. But it may be too late, for even if the Fed (or another nation) intervenes in currency valuations it could force a massive liquidation of the carry trade that will force the selling of higher risk assets (stocks as one example) for any rise in the dollar creates a higher pay back of the original borrow (carry trade). This is why the dollar and the equities market have been so tightly intertwined.

Should the US dollar get into a run away downward spiral it will cause a number of situations to unfold. One situation is that it will prompt other nations to raise hell over the currency devaluation and in turn raise substantially the chances of purposeful foreign currency devaluation on the part of other nations in an attempt to stabilize the FX markets. You see, there is a price to pay when your currency is the worlds reserve currency. The second situation will be a currency dislocation event, that is when commodities, bond markets, and even stocks (as stocks are the highest risk asset among investment classes) will suffer as there is a global shift in currency valuations that will propagate globally. Suddenly valuations of stocks becomes increasingly mute as all references becomes tilted.

Right now we are at a cross roads with respect to the global financial situation. As I type this the Japanese Yen / US dollar cross is literally on the line of either staying above a significant support level, or breaking below it which could possibly be the beginnings of a currency market ‘event’. Wondering what will happen with the US stock market? Forget about valuations, forget about better than expected or worse than expected at the moment. All of that is for the most part meaningless at this juncture (and has been in recent months). Right now one only has to turn to the FX markets as it is there that traders, hedge funds, and sovereign wealth funds are watching.

The US stock market is currently over valued on even a basic fundamental basis and over bought on a technical basis. Should the US dollar rise equities will be even further over valued as the reference currency plays havoc on the pricing of equities. Not to mention the rapid selling of higher risk assets to unwind the carry trade.

Should the US dollar go down a dark rabbit hole it will raise the potential significantly of a global currency market storm. That is the risk we face with the dollar being the reserve currency and why so many nations are still considering abandoning the dollar as the reserve.

The risk of holding assets in the equities (stock) market is extremely high. Go ahead and chase those stocks higher and higher if you wish. But don’t say no one warned you of what might happen if the currency market dislocates, or the US dollar carry trade is forced to unwind in a panic.

I remain bearish on US equities. There is more to understanding the market than just the price of Google stock. In general, the older one is the more they see danger in this market for it is us older folk who have witnessed more. As Art Cashin (one of those old timers on Wall Street) stated today there is so much air supporting this market that any upset we could see a fast 1,000 point drop ( Dow Industrial) very quickly.

The entire financial crisis is still playing out. Little has changed, only the names have changed. US stock market prices are indeed floating on air and have been for a considerable amount of time. It remains my opinion that equities should be sold and a safer position be maintained. If there is a severe currency market dislocation there will be no safe investment other than to be out of the market. Once again this is my view and I will continue to trade my own account accordingly. You on the other hand must decide for yourself if you feel safe with your money tied up in the equities market that is being elevated on a devaluing currency, which so happens to also be a global carry trade. Cross your fingers that a massive currency dislocation event does not happen.

Trade at your own will,  but be warned there is danger all around.

Even FOMC member Fisher said on November 16 -

“Carry trade usually ends in tears”

More on this topic (What's this?)
Protecting Your Dollars With Foreign Currency (Dividends Value, 9/30/09)
Abraham Lincoln's 17 Point Monetary Declaration (Stock Market and Economic Analysis, 11/1/09)
Central Banks Diversifying Away from Greenback (naked capitalism, 10/11/09)
Read more on U.S. Dollar (USD), Currency at Wikinvest
Filed Under: Market Updates Tagged With: , ,

American Empire Bankrupt

June 15, 2009 By Chuck

(Hat tip to ‘bee’ for this article)

Truthdig has a very interesting article on the U.S. Dollar and the world’s reserve currency. A harsh look from a different perspective.

This week marks the end of the dollar’s reign as the world’s reserve currency. It marks the start of a terrible period of economic and political decline in the United States. And it signals the last gasp of the American imperium. That’s over. It is not coming back. And what is to come will be very, very painful.

Barack Obama, and the criminal class on Wall Street, aided by a corporate media that continues to peddle fatuous gossip and trash talk as news while we endure the greatest economic crisis in our history, may have fooled us, but the rest of the world knows we are bankrupt. And these nations are damned if they are going to continue to prop up an inflated dollar and sustain the massive federal budget deficits, swollen to over $2 trillion, which fund America’s imperial expansion in Eurasia and our system of casino capitalism. They have us by the throat. They are about to squeeze.

There are meetings being held Monday and Tuesday in Yekaterinburg, Russia, (formerly Sverdlovsk) among Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization. The United States, which asked to attend, was denied admittance. Watch what happens there carefully. The gathering is, in the words of economist Michael Hudson, “the most important meeting of the 21st century so far.” [...]

[...] I called Hudson, who has an article in Monday’s Financial Times called “The Yekaterinburg Turning Point: De-Dollarization and the Ending of America’s Financial-Military Hegemony.” “Yekaterinburg,” Hudson writes, “may become known not only as the death place of the czars but of the American empire as well.” His article is worth reading, along with John Lanchester’s of the world’s banking system, titled “It’s Finished,” which appeared in the May 28 issue of the London Review of Books.

“This means the end of the dollar,” Hudson told me. “It means China, Russia, India, Pakistan, Iran are forming an official financial and military area to get America out of Eurasia. The balance-of-payments deficit is mainly military in nature. Half of America’s discretionary spending is military. The deficit ends up in the hands of foreign banks, central banks. They don’t have any choice but to recycle the money to buy U.S. government debt. The Asian countries have been financing their own military encirclement. They have been forced to accept dollars that have no chance of being repaid. They are paying for America’s military aggression against them. They want to get rid of this.”

Read the full article at Truthdig

Filed Under: Market Updates Tagged With:

China To Axe The US Dollar?

May 18, 2009 By Chuck

Again we find ourselves hearing chatter from the other side of the globe that China wants ‘other’ currencies.

Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.

The move follows recent Chinese challenges to the status of the dollar as the world’s leading international currency.

Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao, China’s president, first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month.

An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.[...]

Mr Zhou recently proposed replacing the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Mr Zhou said the goal would be to create a reserve currency “that is disconnected from individual nations”.[...]

[...]In what was interpreted as a sign of Chinese concern about the future of the dollar, the governor of China’s central bank proposed in March that the US dollar be replaced as the world’s de-facto reserve currency.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency ”that is disconnected from individual nations” and modelled on the International Monetary Fund’s special drawing rights, or SDRs.

Economists have argued that while the SDR plan is unfeasible now, bilateral deals between Beijing and its trading partners could act as pieces in a jigsaw designed to promote wider international use of the ­renminbi.

Any move to make the renminbi more acceptable for international trade, or to help establish it as a regional reserve currency in Asia, could enhance China’s political clout around the world.

Source: Financial Times

More on this topic (What's this?)
Andy Xie on China’s Empty Apartments (naked capitalism, 8/4/10)
More Incoherent Remarks From China on Its Dollar Holdings (naked capitalism, 8/2/10)
MARC FABER: CHINA COULD CRASH (THE PRAGMATIC CAPITALIST, 8/2/10)
Read more on Investing in China, U.S. Dollar (USD), Investing in Brazil at Wikinvest
Filed Under: Market Updates Tagged With: ,

Reserve Currency – US Dollar In Trouble

March 19, 2009 By Chuck

China and other emerging nations back Russia’s call for a discussion on how to replace the dollar as the world’s primary reserve currency, a senior Russian government source said on Thursday. Reported by Reuters.

Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar’s status as world’s sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decision making globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.

[...]A U.N. panel of experts is also looking at using expanded SDRs, originally created by the International Monetary Fund in 1969, but now used mainly as an accounting unit within similar organizations as a new reserve currency instead of the dollar.[...]

Just as I described in my summary video last evening. The Federal Reserve and Ben Bernanke only want to address short term needs and ignoring the long term implications. If Ben Bernanke keeps up his printing presses and the Treasury keeps up bailout after bailout then the U.S. dollar will be the laughing stock of the world.

Filed Under: Market Updates Tagged With: , ,