The ailing US$, a problem?

[colddiesel]

The Almighty dollar.

For 62 years at least the $US has unquestionably been the the most important currency in the World and its constant strength has been almost assumed in all economic debate. Yet despite its conservative principles (which I substantially agree with ) the present administration has executed its economic policies with such a want of competence that the once mighty dollar is beginning to look pretty sick.

A few disturbing facts:-

The dollar has fallen consistently for 12 months or so against all other reserve currencies, the Euro the Yen and the Pound and it hasn't fared well against the secondary currencies examples being the Riyall, the Swiss Franc, Canadian and Aussie dollars and above all the Chinese currency.

Western Europe and Japan effectively ceased to purchase US government Bonds a year or so ago leaving China as the only significant foreign buyer.China is now a reluctant buyer with recent issues showing a drop in foreign buyer interest by up to 80% China and Saudi Arabia the latter holding some 300 billion in US paper( can't find the Chinese figure) are both looking to offload. Japan UK and Germany all with massive direct investment in the USA appear not to be worried at present.
But, who will finance the US deficit and ultimately, US private debt

The massive increase in private debt in the US manifested in sub-prime debt problems and insolvencies does not seem to be curable(or delayable ) by the Fed without producing a sharp rise in inflation and thus further downwards pressure on the dollar.

The war in the middle East continues and there is nothing like a war to increase government spending and the resultant need to raise cash.

World trade talks in the past two years have broken down in the face of subsidy policy intransigence in the EU. USA . and Japan

It seems to me that the best that might be hoped for is a managed slide in US dollar value and a worst perhaps a significant run on the dollar.This would be a major problem not only for the USA but for the rest of the World.

In another thread some concern has been expressed in the possibility of Crude Oil at $150 a barrel and petrol(gas) at $3 per gallon. If the scenario I expect comes to pass $3.50 to $4 per gallon could be cheap.

I haven't set out an exhaustive case( I'm a very slow typist) but there seems to be a real issue here. What do you think?

 

[Somme]

With all the signs pointing to an even worse scenario than what was the case in 1929 one could almost expect manure to hit the ventilator in great quantities.

Should oil be quoted in another currency - start planting lots of potatoes.

 

[rgraham666]

I've been reading economists who have been worrying about this since about 2004.

But they're all 'liberals' and so weren't listened to by the people making the decisions.

Now the U.S. is learning a lesson that was the centre of the plot of many ancient Greek tragedies: Hubris in inevitably followed by Nemesis.

 

[trysail]

I've been reading economists who have been worrying about this since about 2004.

But they're all 'liberals' and so weren't listened to by the people making the decisions.

This is such a patently absurd assertion of "fact" that I will ignore it completely.

 

[flavortang]

This is such a patently absurd assertion of "fact" that I will ignore it completely.

Actually, you didn't ignore it at all. But it's all good.

 

[3113]

This is such a patently absurd assertion of "fact" that I will ignore it completely.

It's not, actually. ROB said he'd read economists who were all liberal warning against this. Rob alone knows if this is true...you don't know who he's been reading, do you? He said they were all ignored. Again, as you don't know who he was reading or whether they were ignored by others because of their liberal leanings, you can't say if this is also not true.

In short, Rob made a statement that you have no way of knowing is absurd or not. He didn't say "ONLY liberals warned against this," which you might KNOW is an absurd fact. Whether what he said was "absurd" or not is not something you can possibly know...unless you're under the assumption that there are no economists out there labeled "liberal" and not listened to by conservative economists because of it...which is pretty absurd.

 

[rgraham666]

To be honest, I don't know if said economists are actually 'liberals'. Since they worried about a runaway federal deficit and debt, and advocated higher taxes as a possible solution I assumed them to be 'liberal'.

They also tended to advocate cut backs in services, or at least not increasing the money spent on them as well. So they could also be 'conservative'.

At any rate, I've been aware for some time that a section of the economic community has been very worried about what is now happening. It's happened repeatedly in history, with similar results every time.

 

[SharonIsKewl]

A 15 year all time low is bad news for sure.

 

[champagne1982]

The Almighty dollar.

For 62 years at least the $US has unquestionably been the the most important currency in the World and its constant strength has been almost assumed in all economic debate. Yet despite its conservative principles (which I substantially agree with ) the present administration has executed its economic policies with such a want of competence that the once mighty dollar is beginning to look pretty sick.

A few disturbing facts:-

The dollar has fallen consistently for 12 months or so against all other reserve currencies, the Euro the Yen and the Pound and it hasn't fared well against the secondary currencies examples being the Riyall, the Swiss Franc, Canadian and Aussie dollars and above all the Chinese currency.

Western Europe and Japan effectively ceased to purchase US government Bonds a year or so ago leaving China as the only significant foreign buyer.China is now a reluctant buyer with recent issues showing a drop in foreign buyer interest by up to 80% China and Saudi Arabia the latter holding some 300 billion in US paper( can't find the Chinese figure) are both looking to offload. Japan UK and Germany all with massive direct investment in the USA appear not to be worried at present.
But, who will finance the US deficit and ultimately, US private debt

The massive increase in private debt in the US manifested in sub-prime debt problems and insolvencies does not seem to be curable(or delayable ) by the Fed without producing a sharp rise in inflation and thus further downwards pressure on the dollar.

The war in the middle East continues and there is nothing like a war to increase government spending and the resultant need to raise cash.

World trade talks in the past two years have broken down in the face of subsidy policy intransigence in the EU. USA . and Japan

It seems to me that the best that might be hoped for is a managed slide in US dollar value and a worst perhaps a significant run on the dollar.This would be a major problem not only for the USA but for the rest of the World.

In another thread some concern has been expressed in the possibility of Crude Oil at $150 a barrel and petrol(gas) at $3 per gallon. If the scenario I expect comes to pass $3.50 to $4 per gallon could be cheap.

I haven't set out an exhaustive case( I'm a very slow typist) but there seems to be a real issue here. What do you think?

The falling USofA dollar doesn't make the currency any less important. It just means that other nations have more buying power. It's tough to have only pennies to spend when everyone else seems to have more disposable cash.

 

[trysail]

It's not, actually. ROB said he'd read economists who were all liberal warning against this. Rob alone knows if this is true...you don't know who he's been reading, do you? He said they were all ignored. Again, as you don't know who he was reading or whether they were ignored by others because of their liberal leanings, you can't say if this is also not true.

In short, Rob made a statement that you have no way of knowing is absurd or not. He didn't say "ONLY liberals warned against this," which you might KNOW is an absurd fact. Whether what he said was "absurd" or not is not something you can possibly know...unless you're under the assumption that there are no economists out there labeled "liberal" and not listened to by conservative economists because of it...which is pretty absurd.

The problem is neither "liberal" nor "conservative" (whatever the hell those words mean), as Rob has acknowledged. The problem is one of "living within one's means." I'll leave it to you to define whether Warren Buffett or "Pete" Peterson or any of the multitude of other intelligent observers are "liberal" or "conservative." Here are some estimates:

Balance Sheet
The United States of America

Assets.....................................Liabilities

..............................................Social Security.....$11,000,000,000,000
..............................................Medicare................ 66,000,000,000,000
..............................................Treasury Debt..........9,000,000,000,000

..............................................Total Liabilities...$86,000,000,000,000


Against these known liabilities, the government has the ability to tax:

The whole stock market.........................~$18,000,000,000,000
All of the privately owned real estate.....~35,000,000,000,000
(basically, that's the net worth of everybody in the whole country)

Now comes the $64,000 question: is the U.S. solvent? The answer is: yes, of course- the government can print money. The only problem with printing money is that when the government chooses that alternative, it automatically creates inflation. That's the choice Weimar Germany made- look how well that worked out! So, if the government decided not to print money, where else can it get it? Well, the ugly answer is that it might be forced to tax away the entire net worth of all its citizens. That's right folks- even if you took away ALL of Bill Gates' money and all of Warren Buffett's money and all the money of all the rich people, there still isn't enough to pay for all the promises the politicians have made. Taking all the rich people's money (and everybody else's for that matter), of course, begs the question of why anyone would bother working if the government decides that it's simply going to take away everything anyone earns.

The politicians in this country may not have invented the concept of "something for nothing," but they sure as hell have perfected the art and science of it by promising everything to everybody.

 

[Chantilyvamp]

From personal experience the falling dollar hurts me and the hubby like a knife dipped in salt and vinegar and rammed in your tummy. We are paid in US dollars and then it is converted into our Pound checking account. I read the exchange currency in the paper and bite my lip and try and ignore I ever saw it. But the bank account doesnt lie. When its bad its really bad and we can count on losing as much as 500-600 pounds on a check. When its better we retain more of the money.

 

[Stella_Omega]

...Yet despite its conservative principles (which I substantially agree with ) the present administration has executed its economic policies with such a want of competence that the once mighty dollar is beginning to look pretty sick...

This ought to tell you something very important about this administration and its "principles."

 

[xssve]

The currency level isn't that big an issue, Reagan made a big deal abotu it "the dollar is strong because America is strong", etc., but it really doesn't mean a wholelot except in terms of imports/exports - unless yoru talkindg serious deflation/inflation, and we're not.

Inflation is creeping up on us, mostly due to energy prices, but the fed likes low inflation, and is generally inclined to keep tight control of the monetary supply in order to keep it low. Monetarism, it's called, and it works by manipulating the interest rate - raise interest rates and/or print less money, and the "cost of money" rises - money gets tight, inflation falls off - also people get laid off, the labor market loosens, and wages fall as a result - this is the main reason the fed raises interest rates, like in the late Ninties, and they tell you so.

The theory here has to do with the effects of inflation, and the debate dates back to the Sixties and the Kennedy tax cuts.

This is going to be long, so punch up your font size and sit back, I'll try to keep the paragraphs short - those with short attention spans - shit you're writers fer chrissakkes - can scroll without comment.

Prior to the tax cuts, initiated by Kennedy and implemented under Johnson, the prevailing economic theory was Keynesian theory, which posits that government plays a role in economic growth through spending - this works in various ways: investing in infrastructure creates the opportunity for economic growth, i.e., cretes business opportunities that would not otherwise exist - the transportation, energy and communications infrastructure is what makes 90% of modern businesses possible, creating the means of generating sales, getting goods and services to market in a timely fasion, generlaly broadening the market itself in terms of accessability, as well as facilitating intrabusisiness communication, distributed manufacturing, etc., which drive also serve to drive the price of goods and services down by making business more efficient.

Keynesian theory posits deficit spending in order to bridge cyclical recessions, mainly infrasutructure, but also consumption stimulus which facilitates the creation of economies of scale, jump starting manufacturing, etc., and also funding basic research which is too expensive for individual firms, even very large ones, to devote their capital to - these firms instead are able to devote their capital to applied research, based on the public basic research, available to all, in order to develop products for sale at market, and becuase this basic research is public domain, it generates competition very much in line with Capitalist theory, and all forms of stimulus which not only create jobs in the short term, the CCC back during the New deal, private contractors currently, etc., but lay the foundations for ongoing and continuous economic growth.Similarly, public education provides the educated and mobile work force prescribed by Smith in order to furnish the flexibility that the feudal apprenticeship model did not provide.

The result is a synergystic effect, public investment facilitating private investment, which facilitates economic growth, and the successes of it are legendary and undeniable.

The fly in the ointment was actually the Kennedy tax cuts. Concieved as another form of Keynsian stimulus, it was suggested when the war debt was finally getting down to managable size, the interstate infrastructure and energy grid was largely complete, educational institutions established in most regions, standards set, etc. and it was based on on a new theory, the Laffer Curve.

Essentially, the big worry at the time was that although the economy was strong, Americans were not saving enough money, according to then current economic theory which theorized one quarter of income devoted to housing, one quarter to food, one to disposable income, and the last quarter to savings.

Except that nobody was saving one quarter of their income, and the theory was that that quarter was being devoted to taxes - cut taxes, and that money would end up in savings accounts - it was theorized that Major Keynesian stimulus had done it's work, there would be ongoing stimulus in various areas, but the big things were already done, so cutting taxes seemed like an idea whose time had come.

The effects of the tax cuts, once implemented however, were very different from what Laffer had predicted: instead of saving, the extra money went straight to the disposable income column, and Americans weent of a consumer spending spree of legendary proportions.

New cars for the new highways, radios, televisions, toasters, refrigerators, etc. that could take advantage of the electrical grid, etc., etc.

All good, in terms of business, but production could not keep pace with demand, demand pull inflation caused higher prices, higher prices led to wage demands, workers needed more money to pay the higher prices, and higher wages created more inflation as rising variable costs were reflected in pricies, which led to more wage demands, etc., etc. - the "inflationary spiral" which gathered steam right up until the end of the Seventies when after inflation reached into double digits, and there had been several successive quarters of negative growth, the Fed pulled the plug, raised interest rates, and the economy went into steep recession.

Often blamed on Carter, the inflationary spiral had raged all through Johnsons administration, as well as the Nixon and Ford administrations - it had been masked by more deficit spending for the Vietnam war, but hit home when Nixon pulled the troops out - he tried wage and price controls, and Ford tried various other things, none of which worked, and eventually, the Fed acted, Paul Volker, a Carter appointee, cut back severely on the money supply, the economy went into a tailspin, and Reagan defeated Carter.

Now the thing is, consumers, far from suffering under this inflationary spiral, never had it so good: inflation eats away at assets and accounts recievable, and thus, it also eats away at debt - it was a very debtor freindly environment: my parents bought a house at about 12K in the late sixties, when they were both making probobly less than 10K combined - by 1970, they were probobly grossing between 20 and 30K apiece, while the house had appreciated in value to probobly 20 or 30 K, but still only worth 12K to the bank - commodity costs had risen, but real estate costs were fixed, and the banks took the hit.

This, as you can imagine, was a very unpopular state of affairs to the creditor side of the economy, money was everywhere - except in the bank - even the recession caused little damage except to Carters credibility, and unlike the "milder" recession in the late Eighties under Bush, nobody lost their homes, jobs, etc., money just got a little tighter.

This history is utterly critical to understanding everything that has happened since: the creditor side of the economy has devoted itself wholly and utterly to making sure this thing never happens again - there will never be any substantial demand side tax cuts again - in fact the middle class tax rate is practically unchanged since the Kennedy cuts, they haven't been substantially cut under supply side theory because of the fear of an inflationary spiral, and they weren't raised appreciably under debt reduction under Clinton, because it's political suicide - these tax rate have changed less than 5 points either way since the Sixties.

So, to go back to history, a small group of conservatives got together and came up with supply side theory. This theory was designed to address the poductivity issues that accompanied the inflationary spiral: stagnation = inflation = "stagflation". Ideally, had productivity kept pace with demand, it would have greatly mitigated the effects of the inflationary spiral, by reducing that demand pull inflation that triggered the spiral to begin with.

The situation, as percieved at the time, was that firms had become morbibund mainly through fat at the top: bloated managment, expense accounts, three martini lunches, etc., were eating way at profit margins, and thus investor returns - commody price inflation which increases profits, was simply being drained away by management instead of being invested in capital improvements to increase productivity or distributed as dividends.

Banking degregulation had already been drafted by the democrats under Carter who had also deregulated the airlines, and as implimented under Reagan, combind with tax cuts, were supposed to unleash "creative destruction" through the tool of hostile takeover.

The theory being that a sundden influx of investment liquidity, combined with deregulation in the sort of things banks could invest in, would allow investors to take over unproductive companies, reorganize, trim the fat, and create "leaner, meaner" firms that would be more competitive in global markets.

Instead, much like The Laffer miscalculation, what happened was that instead of reorganizing, firms were cannibalized, and sold off piecemiel: the equipment overseas to China, etc., the facilites, buildings, land, etc., sold as real estate, and the trust funds returned to the liquidity pile, i.e., returned to the investment pool.

In fact, what made firms vulnerable to hostile takeovers often turned out not to be productivity, but those retiremnt trust funds themselves: many of these companies were competitve, but undervalued, and having much of their capital tied up in trust funds where they couldn't touch it - by law, meant they didn't have the capital reserves available to fight off hostile takeovers. These trust funds were also percieved to be the reason - suddenly- that the capital improvements had not been made, and this may have been the fact, the dependency ratio is a huge factor in terms of what capital is doing at any any given moment, and thus has quatifiable effects on the macroeconomy.

Still, what happened, is that many competitive firms were cannibalized, the manufacturing base was sold off practically en masse, and the entire structure of the eeconomy shifted from a production based, debtor freindly economy to a financial based, creditor freindly one.

Monetary policy has been used to keep wages, and expected accompanying inflation under control, republicans took deregulation to the point of dismantling the regulatrory state altogether, which has facilitated the various bubbles - commercial real estate in the Eighties, tech in the Ninties, and now subprime mortages.

The underlying Keynsian paradigm still works however, the productivity boom which never did occur under Reagan - productivity continued to fall even more precipitously - did finally occur under Clinton, with the advent of the internet - the result of a synergy between public investment in the internet, the backbone, protocalls, etc., and junk bond investment in tech start ups, Microsoft, Dell, etc., that provided the hardware to take advantage of it.

So now we're back to the current situation, and ht equestion is really - what is the real rate of inflation? Presumably, the massive deficit spending on the Iraq war is concealing it, and the Fed won't raise interest rates until that ends, or at least until inflation is reflected in erosion of accounts reciavable - inthe meantime the fallign dollar facilitates a reversal of the trade deficit, as it makes our exports cheaper on global markets, inflation is so far confined to commodities, since we import the bulk of our consumer goods, and the labor market is loose enought to keep wage demands down - which considering the import situation, even recent purported wage increases are not enough to trigger and infaltionary spiral - i.e., these wage increases are not reflected in the cost of production because we aren't producing anything except agricultural commodities - the bulk of manufacturing is outsourced and the entire thing is distributed under globalization - a given item might start as raw materials in Africa, be shipped to Japan for manufacturing, then to Indonesia for assembly, and finally to America for sale - and this is a highly simplified narrative, distributed production can be extremely complex.

Anyway, if you read all this, I hope it disabuses you of a number of false notions promulgated by republicans and neo-conservatives, who represent strictly creditors, mainly banking and financial interests, it's not all as bad as it sounds, the only disaster looming is going to be confined to the financial side of the economy, manufacturing is the backbone of any economy, and we'll just have to rebuild that side of things, adn we might move down on the ladder a bit, whether for good or not is an open question, I wouldn't let your self esteem suffer too much over it.

Financialization tends more and more towards just moving money around on paper, zero sum, as opposed to actually creating anything, which is why Smith took such a jaundiced view of it as a foundation for economic growth - important, but it still people making shit and buying and selling to each other that economics itself is based on.

The worst thing that could happen is panic, yes, the neo-cons are headed for a fall, and they'll drag a lot of people down with them, but life wiill go on, it's only like the Titanic, you won't really be swimming in freezing water in the open ocean.

The catalyst may well be Irans oil Bourse, which is strongly suspected to be the real reason the Neo cons are so hot to invade - my take is that if you are reduced to military intervention in order to compete economically, you're doing something wrong.

 

[colddiesel]

Re xssve Currency level is I submit a crucial issue if a sharp slide triggers a collapse in international trade. Then everyone is hurt - badly!

 

[trysail]

The U.S. is, at the moment, exporting inflation to China and the Chinese don't much appreciate it. Their holdings of $1,000,000,000,000 worth of U.S. Treasury debt depreciate with every downtick of the dollar to the RMB. At the same time, our purchases of their manufactured goods are part of what keeps Chinese factories humming and their population employed. Meanwhile, the E.U. has (apparently) surpassed the U.S. as the largest purchaser of Chinese goods and China is bound to be happier holding an appreciating currency rather than a depreciating currency. The Chinese buy petroleum priced in U.S. dollars and it's been costing them a lot more recently; they just might prefer to use euros to purchase petroleum and the sellers of petroleum (read Comrade Chavez and Iran) might just be delighted to accomodate 'em.


If you were in their position, you'd have to ask yourself,
"What am I gonna do with all these little pieces of paper with George Washington's picture on 'em?

Order a whole lotta pizza? Nah, that's probably not a good idea.
Import an army of tort lawyers? Jeeeezus H. Christ, no!
Hire a gaggle of talking heads, lobbyists, journalists, critics, and columnists? I don't think so.
Continue buying U.S. debt? Hmmmm. Maybe that's not such a good idea."

Therein, lies the danger to the U.S. Some of you weren't around when U.S. Treasuries yielded 14%. I was. Interest rates at those levels tend to put a damper on economic activity. Will that come to pass? I haven't the foggiest idea; I'm the last person to ask. I've spent a lifetime watching fools predict the future. The Chinese are not stupid; they understand that they have a symbiotic relationship with the U.S.

 

[Handprints]

What are the five factors which most influence a currency's value and how does the US score on each measure? (Christ, this should be on an exam somewhere. This isn't a complete list, by the way, just a rule of thumb guide to things most likely to affect a currency's relative value. And, full disclosure, I loathe currency stuff almost as much as I hate commodity stuff, so take this with a grain of salt: this isn't my professional specialty.)

Interest rates: US Treasuries offered an ok-ish return but have now been sharply reduced and the trend appears to be down-to-sideways. That makes owning US debt comparatively less attractive: good for equities, bad for the dollar. The US scores badly with a flat-to-worsening trend. (And don't tell me the "full faith and credit" of the US Treasury is worth something more than the equivalent from the ECB: it ain't true.)

Balance of payments: The US imports about 40% more goods and services than it exports, by value, and imports are growing about twice as fast as exports. The amount of stuff the US owns in other countries is worth about 60% of the stuff that other people own in the US. The effect of these figures is that there are significantly more people offering to pay for things in USD than there are people hoping to be paid in USD. The US scores - sorry - horribly badly with a worsening trend.

Other central bank activities: This is the area they don't teach in economics until 4th year, so I won't dwell on details - it includes money supply, redemption conditions, forex reserves. The US is slightly below average, although it probably looks worse than it is because the largest economy is held (rightly or wrongly) to higher standards than, say, Egypt's.

Asset market changes: In the shortest term, transaction volumes dictate forex rates (ie voting, not weighing). In Q2, the most recent quarter for which we have figures, net shipments to foreign countries was USD3.3bn. That figure includes direct investment, buying of stocks and bonds, debts etc. I have few reasons to doubt that it will also be negative for the US in Q3. The trend is negative for the US, although not horribly so.

Size and sustainability of national debt: The less said here, the better. Let's just note that it's currently growing at about USD1000 per head, per quarter. Does that sound sustainable to you?

To make your currency go up, you really only need one of these factors to work in your favour - interest rates are the simplest lever to pull. In order to stay up, you need to have a positive (or at least a change in the direction of) trend in balance of payments or debt.

It doesn't look much like that's going to happen anytime soon.

Hope that's of interest,
H

 

[cantdog]

Thanks, H. A dose of sane thinking about this is very welcome.

 

[Le Jacquelope]

I've been reading economists who have been worrying about this since about 2004.

But they're all 'liberals' and so weren't listened to by the people making the decisions.

Now the U.S. is learning a lesson that was the centre of the plot of many ancient Greek tragedies: Hubris in inevitably followed by Nemesis.

I tend to call it the Chicken Little vs the Ostrich scenario.

Chicken Little has been crying wolf for years, seeing the economic sky being too heavy to be supported for much longer.

The ostrich has been a polyanna, laughing at every stock market rise, saying that the good times will last forever.

Strauss & Howe's studies suggest that even karma is on Chicken Little's side.

 

[trysail]

http://www.geocities.com/brulonmiller/economics101.jpg

 

[Le Jacquelope]

Trysail, life is never that simple. Not even in economics.

You keep leaving out externalities.

 

[Handprints]

You keep leaving out externalities.

You should be glad he does: including them would vastly improve the strength of his argument.

You seem to like one-question pop quizzes, so here's one now:

What's the most common externality on the face of the earth?

Three hints: Engels didn't stop to consider it, it's not a negative, you can find a reference to it on every balance sheet in the capitalist world.

H

 

[trysail]

http://archive.gulfnews.com/business/Oil_and_Gas/10157484.html
10/02/2007 12:12 AM | By Babu Das Augustine, Banking Editor

Dubai: International banks and analysts have hinted at the possibility that Opec will switch the pricing of oil from the dollar to a basket of currencies as the greenback sank to a record low against the euro yesterday.

"If the dollar were to lose its lustre as a reserve currency this could prove disruptive to the global financial system. In the Middle East the market has become concerned that more countries would drop the dollar peg with Opec potentially changing the oil price to a currency basket rather than the dollar," Merrill Lynch said in a note yesterday.

The euro hit a new all-time high of $1.4283 in early Tokyo trade. By late afternoon it stood at $1.4260, down from $1.4266 in New York late on Friday.

With oil exports still priced in dollars and more than 80 per cent of the Gulf countries' reserves denominated in dollars, Gulf central banks have been been reluctant to drop their peg to the dollar.

"Rising oil prices have been serving as a hedge against the decline of the dollar and its impact on exchange rate losses. From the (Gulf) governments' point of view, there hasn't been any urgent compulsion to revalue currencies," said John Sfakianakis, Group Chief Economist at Saudi British Bank. International banks say the situation is changing fast in the context of the rapidly eroding confidence in the dollar as a reserve currency.

Conviction

"Our greatest conviction is that the dollar will weaken further against the yen and Swiss franc. One more worrying facet of the recent dollar weakness has been the market concern that more countries might drop the dollar peg," Merrill Lynch said in a note.

Earlier this year, Kuwait and Syria dropped their peg to the dollar in favour of a basket of currencies. In the context of mounting pressure on account due to rate losses and surging inflation, there has been widespread speculation that some of the Gulf countries including the UAE and Qatar would either revalue or depeg their currencies. Despite Gulf central banks insisting their commitment to the dollar peg, the currency markets witnessed frenzied speculative buying of the UAE dirham, which virtually forced the UAE Central Bank to cut its three-month CD (certificate of deposit) rate by 15 basis points.

Although the market has already factored in poor US jobs data, currency traders are waiting to see if the Fed will reduce interest rates again. The UAE and Kuwait cut their lending rates by 50 basis points and 25 basis points respectively, last month in response to the US rate cut, while others such as Saudi Arabia and Oman have yet to respond.

Economists said any further rate cuts could place Gulf central banks in a difficult position as the rate cut could fuel inflation and any reluctance to cut interest will fuel speculation in currencies. "The (Gulf) economies are experiencing a period of strong growth and ample liquidity. Lower nominal interest rates will provide further stimulus to inflation," said Monica Malik, an economist with EFG Hermes.

 

[Handprints]

"If the dollar were to lose its lustre as a reserve currency this could prove disruptive to the global financial system...," Merrill Lynch said in a note yesterday.

I remember the anguish and resentment with which corporate treasury departments adjusted their systems to accommodate the euro. Now, of course, given the convenience and lower costs, they'd never go back.

I'm impressed that it has taken less than a decade for governments to start wondering if disruptions in the global financial system might be a good price to pay for a better-diversified forex reserve.

H

 

[xssve]

It occured to me that part of the neo-con strategy for the invasio of Iraq apparently consisted of lflooding the country with American currency - a move which cannot have had any other efect than undermining Iraqi currency, and expandingthe Black market in American currency - is there even an Iraqi currency anymore?

 

[trysail]

It occured to me that part of the neo-con strategy for the invasio of Iraq apparently consisted of lflooding the country with American currency - a move which cannot have had any other efect than undermining Iraqi currency, and expandingthe Black market in American currency - is there even an Iraqi currency anymore?

Huh? Wha? Where did that little (ahem) "fact" ("part of the neo-con strategy for the invasio of Iraq apparently consisted of lflooding the country with American currency") come from?

1.00 US DOLLAR (USD) = 1233 IRAQI DINAR (IQD)