Dollar and it’s rivals

The Chinese Yuan, the Australian dollar, the Brazilian real, Canadian dollar and many other currencies of commodity nations will probably rise to the dollar. But, most of all to oil, copper, iron, silver, etc.

There are several currencies that are expected to fall with the dollar.

Currencies are not really valued against other currencies in reality, only in accounting between nations due to trade. What we see is that in a basket of currencies, they may all be falling, but falling at different rates, thus, making one currency look like it is rising when in fact it is just not falling as fast. Yet, when you look at the price of copper, for example, in all the currencies or oil or gold or grains, you see they are ALL paying more because hard assets are the real determination of value.

Your are correct that any flight to equities is going to cause yields to go up on bonds. The problem wasn’t so much the yields going up as it was the selling of bonds to the FED, here. At the same time they were buying more of the short term debt so that they can roll it over or not roll it over, each time it comes due.

The dollar is at greater risk than most currencies because of it being the world’s reserve currency which was why it use to be at the least risk. What has changed?

The world is moving away from the dollar in trade deal after trade deal. Brazil’s leading export consumer was the U.S. It is now China so it has made a deal to use the Chinese currency but, even more, has struck an agreement with Argentina to stop using the dollar in trade between them and four other S.A. nations have agreed to join in shunning the dollar. Iran sells its oil in euros and yen now. China has made six other deals with nations to stop using the dollar in trade between them. The pressure is on the IMF to use SDR’s instead of dollars for its loans.

We have the major problem that is causing many of the moves away from the dollar that isn’t going away and that is our deficits that are so large there isn’t enough money in the world to lend to us. We want about $2 trillion but, the IMF says another 11 nations want $8.2 trillion and there isn’t enough money for even what we want. That means we either cut the spending or print the money. Either way, we are in trouble. If we cut the spending, due to 1 in 4 jobs tied either directly or indirectly to government spending, the layoffs from cuts in spending would be very large and put at risk, our ability to pay interest on debt which is to quadruple according to our own Gov. CBO in the next few years. We have 22 million government employees and only 124 million private sector non-farm workers, or 1 in 6, just in direct employment. Add the 100’s of thousands in the private sector tied to defense or supplying government with office supplies or equipment, etc. or other needs that government spends money on like grants, subsidies and other government contracts.

The dollar is expected to fall 40% from here even if it doesn’t collapse because of the things we are doing. But, as you point out, to what? While the euro is climbing, it is only a reference point that is 57% of the basket of currencies the dollar is measured to. The real test is what is oil, grains, copper and other hard assets doing. If the dollar continues to weaken, oil will go over $100 even with more than adequate supply.

The emerging markets are expected to grow GDP 3% this year on average while the developed nations fall 3%. That is why it is hard to get a good reference to the other currencies because they are from developed nations that are in deep economic trouble.

The biggest risk may be that we have the world turning its back on the U.S. and pouring money into the emerging market. In some of the analysts this morning, on the financial news, they were saying that people need to invest in emerging markets. That hurts the dollar because they aren’t investing in U.S. business. They are telling people to buy foreign bonds in commodity nations or to buy commodities or gold or silver. None of that is bullish for the dollar.

The one big argument I hear is that there is no currency that can replace the dollar as the global currency. Correct but, there doesn’t need to be as we are seeing in these trade deals. They are not going to “some other currency.” Instead each trade deal is using a different set of currencies that they determine how they will value. Whether they succeed or not, we won’t know for a while and I do believe in the coming decade or so, a new global currency will emerge if the IMF doesn’t create one, but the thing we need to focus on is that they are abandoning the dollar.

The trillions in other nations is what will determine the fate of the dollar. One recent article says China has already decided they will have to write off the $2 trillion they hold or at least quite a bit of it. They are currently trying to reduce that loss by stockpiling commodities, including oil, sold in dollars. They are building huge oil storage facilities and storing oil in tankers as they wait for completion of those facilities. At some point, when they feel it is time to sever the tie to the dollar, they will do it and take the loss.

–Jan

Related Posts:

• Can the U.S. have hyper-inflation?
• As long as there is a belief that we are stabilizing and ‘turning the corner’ the market will march higher.
• World Reserve Currency: The Possible Contenders
• China Can Pass U.S with Stopped Growing
• Soros: Dollar WIll Be Replaced By World Currency

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