Late on Friday Venezuela shocked the world when instead of reporting an update on the ailing health of its leader, as many expected it would, it announced the official devaluation of its currency, the Bolivar by nearly 50% against the dollar yet still well below the unofficial black market exchange rate. By doing so, it may have set off a chain reaction among the secondary sovereigns in the world, those who have so far stayed away from the “big boys” currency wars, or those waged by the Big 6 “developed world” central banks, in an attempt to also “devalue their way to prosperity” and boost their economies by encouraging exports even as the local population sees a major drop in its purchasing power and living standards. So in the game, where the last player to crush their currency inevitably loses, the question is who is next. The answer may well be America’s latest best north African friend, and custodian of the Suez Canal: Egypt.
As Reuters reports, in the ongoing underreported counterrevolution against the Muslim Brotherhood’s US-backed regime, the local population is increasingly scrambling to preserve their local-denominated paper wealth by converting it into the same currency that Bernanke is hell bent to crush some by some $85 billion per month. Problem is – Egypt is out of dollars.
The Argentine government is further tightening the US dollar clamp. On Thursday the Central bank announced that state-run banks and agencies will be the only ones officially allowed to operate foreign currency exchange offices in airports and ports.
Each foreign traveller will be allowed to change up to 500 US dollars on arrival in Argentina, the Central Bank said.
The decision also cancels all permits to private banks and exchange houses that currently have branches at airports and ports dealing in foreign currency, the state-run news agency Telam said.
The Central Bank said in a press release that it had taken the decision due to what it described as “abusive practices that affect travellers arriving in Argentina.” It also said that the move was part of the national government’s fight against money laundering and terrorism.
While Europe is once again experiencing one of its brief, manic episodes of inexplicable euphoria sending all risk assets in the continent higher while everyone is still on vacation (and ahead of a surge in Spanish bond issuance in September, which only spikes even more in 2013 – more shortly), its banks have quietly run out of dollars again. Certainly, looking at the now irrelevant metric known as Libor which indicates precisely nothing of significance, and merely allows banks to feel good about themselves, and which has been declining, one could imagine that banks have zero problems finding unsecured follar funding. One would also be absolutely wrong because as the most recent ECB and Fed data confirm, 7-day dollar swaps between the ECB and New York Fed – the only real sign of dollar funding scarcity - has risen to $9.3 billion in the current week, the highest since December 9, 2009. And with 10 banks bidding at the last USD operation, one can be sure that at least 10 European banks are suddenly hoping that the bout of euphoria continues for at least 2 more weeks so that the executives of these 10 dollar impaired banks can continues their vacation in peace, until the eye of the European hurricane passes starting September 1.
The eurozone banking system is on the edge of collapse as major lenders begin to run out of the assets they need to keep vital funding lines open.
Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as US Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding.
After years of out of control hyperinflation, at the end of last month, the nation of Zimbabwe announced it only had $217 to its name. By this point, what with salaries and normal expenditures, that’s probably more like negative a billion Zimbabwe dollars.
“Last week when we paid civil servants there was $217 (left) in government coffers,” Biti told journalists in the capital Harare, claiming some of them had healthier bank balances than the state.
“The government finances are in paralysis state at the present moment. We are failing to meet our targets.”
The Venezuelan government has cut the official number of dollars Venezuelans can spend abroad with their credit cards from $5,000 to $2,500 a year.
The measure aims to preserve foreign currency reserves amid the global economic crisis and Venezuela’s own declining oil revenues.
It tightens restrictions in place since a prolonged oil strike in 2003.
- VENEZUELA DEVALUES FROM 4.30 TO 6.30 BOLIVARS
- VENEZUELA NEW CURRENCY BODY TO MANAGE DOLLAR INFLOWS
- CARACAS CONSUMER PRICES ROSE 3.3% IN JAN.
As the U.S. economy recovers, a strengthening dollar might cause the next financial crisis, warns Singapore-based economist Andy Xie.
“The first dollar bull market in the 1980s triggered the Latin American debt crisis, the second the Asian Financial Crisis. Neither was a coincidence,” Xie writes for Caixin Online, a website specializing in China’s financial and business news.
When the dollar is in a bear market, liquidity flows into emerging markets, causing their currencies and asset prices to appreciate, which supports domestic demand.
ANALYST: We Are Entering A ‘Strange World’, Where The Dollar Gets Stronger, And Things Get Way More Unstable
SocGen’s Sebastien Galy explains how we’re entering a “strange world” where the dollar is bound to strengthen. And the US global military footprint is bound to shrink (due to lower resource demand).
“In 1979, snow reached the second floor in Washington DC, in 1998 the electrical grid of Quebec physically collapsed, yesterday a few inches of snow in NY made headlines worldwide. Much as snow, it is the steady accumulation that matters for the trade balance and the USD. This global imbalance has risen to the size of an elephant as the rest of the world grew more from exporting to the US. In Pratchett’s imagery, the elephant has been riding on four increasingly restive turtles and holding the weight of the world on its shoulders. This elephant is on a diet.
The US trade balance shows rising evidence that the US is moving towards energy independence, changing fundamentally the path of the US current account balance and the Fed’s ability to weaken the USD. Add to this the steady risk of tighter fiscal policy (sequestration debate) which would reduce the need for external funding and pressure on corporates to hand over their cash stored mainly in EM and we are in a strange world where the USD is doing better in a risk rally.
The US trade balance was notable by the lower demand for energy. As this vulnerability diminishes, it has economic and strategic implications. Strategic implications suggest a lighter US footprint globally and hence more political risks abroad as some have noted. Economic implications vary from the lower need to hedge oil imports which strengthens the USD to an improved balance sheet for the US. The Fed’s ability to weaken the usd is reduced as the back end of the UST curve will be in limited demand from foreigners, if they continue to expect an eventual normalization of Fed policy. A higher yield reduces the need to divest out of the USD, reducing an accelerator of usd weakness.”
If the sequester (the cuts to military spending) go through, people will look back and find it interesting that Washington grew willing to make cuts just as people started to talk about declining US oil imports.