THE US Dollar Thread (merged)

[Kingcoal]

When the losses quit being paper losses, shit hits the fan. China and Japan want the buying to continue. When Americans loose their buying power, they loose their power.

In the mean time, Europe is finding out that having lots of buying power isn't such at great thing for profitability of their companies.

Volkswagen Profit Falls on Sales Drop in China, U.S.

[maverickdoc]

US net capital inflows dip to $61.3 bln in Dec cutting it real close

WASHINGTON, Feb 15 (Reuters) - Net inflows of capital into U.S. assets eased to $61.3 billion in December, in line with expectations and enough to finance the nation's current account deficit that month, a Treasury Department report showed on Tuesday.

Net inflows of capital in December slowed from a revised $89.3 billion in November that was originally reported as $81.0 billion. November's inflow was the highest level since $103.9 billion in May 2003.

Currency analysts had forecast a net inflow into U.S. assets of roughly $60 billion for December.

Financial market participants watch the report as a measure of foreigners' appetite for U.S. assets.

The United States depends on foreign investors buying U.S. assets like Treasury bonds to finance its current account deficit, and so net inflows short of the deficit could have increased selling pressure on the dollar.

The dollar initially recovered some losses against the euro on the news that December's flows would have been just enough to offset the $56.4 billion monthly U.S. trade deficit in the last month of 2004.

http://yahoo.reuters.com/financeQuoteCo ... 638_newsml

[maverickdoc]

maybe I should change the name of this thread

http://yahoo.reuters.com/financeQuoteCo ... 073_newsml

1.30 to 1.32+ over night!!!

Hold on folks its going to get bumpy

[skateari]

I think the dollars recent comeback is just a move by China to allow them a high price on their dollars when they sell them. China has been using its banks to trade dollars recently in order to raise the value of the dollar. This, I think, is a move to allow them to sell out of the dollar at a high price. It should also allow the world a chance to sell their dollars at minimal loss. This should all work well if it is managed and if everyone knows when to dump.

This is scary because as of the last few days, massive selloffs of the dollar has been occuring. This could mean that the dollars high-point has been reached and now the planned selloff will happen. This will be a very hard hit to the dollar as all of its supports and pegging will bail out all at once so China will only incure minimal losses.

Nows the time to buy Euros or Gold

[maverickdoc]

One major reason people are bailing out of the dollar is because oil is getting too expensive to buy in dollars. Think about it if you hold dollars then a barrel of oil cost $51. If you hold euros it you can get it for 38.63 euros. This is because crude is universally priced in dollars and if you hold a currency like the euro that is stronger, you win because of the conversion (51/1.32) quite a bargain don't you think? You may have to finally convert your currency to dollars (and take a conversion risk) but you still come out way ahead. Iran currently accepts Euro so it’s even better no conversion risk.

As the price of oil goes up the value of dollar will go down

[pea-jay]

Looks like some of our Asian creditors are "reexamining" their dollar holdings. S. Korea wants to diversify their holdings. Watch out for falling dollar (values).

[Ferretlover]

I found this article at: http://msnbc.msn.com/id/7037973/site/newsweek/

What I found the most interesting is the section I highlighted. It seems that before any nation that is a part of the G7 can sell off its reserve currency they have to get permission. I agree Japan would never sell any of their dollar reserves. By putting all of their eggs in one basket already they have made it impossible to sell anything or else they will lose everything.

As for China, westerners foolishly think China would not screw the US, because the US is China's biggest customer. They falsely think China is interested in making profits. China cares nothing about money. China wants to be a military power. Their 50 years of isolation under Mao kept them in the stone age while the rest of the world grew technologically. When China finally woke up they realized to their horror they could never be a world military power in the 21-st century if their weapons consisted of spears and arrows compared to the rest of the world arsenal.

China had two choices. 1.) Develop over time to catch up or 2.) Have someone willing give China the technology for free. By offering a low wage advantage China was able to lure US companies to China willing to give technological know-how in exchange for cheap products. The Chinese could never modernize this fast on their own. China may not be ready to dump the US yet, but deals that China makes with nations the US considers rogue is a sign the break-up is not that far off.

Here is the portion of the article dealing with the Japan and China:

The Dollar: 'Critical Turning Point'

It was just a subordinate clause in a dense 32-page report to a parliamentary subcommittee, but when the Bank of Korea last week indicated that it might begin to diversify its foreign reserves away from the dollar and into other currencies, traders around the world panicked. The dollar dropped 2 percent against the won in one day, and lost most of its gains against the euro so far this year. It ended the week down at $1.32 to the euro. And a big question hung over the markets: will China and Japan follow South Korea, leading to a plunge in the dollar?

Short answer: no. "This is all overblown," says Morgan Stanley chief currency analyst Stephen Jen. "The whole mindset of how currency traders respond to and digest news is very unhealthy." The market reaction was based partly on the mistaken belief that Korea was preparing to dump dollars, rather than diversify future purchases of foreign currency.

In fact, this is already happening. A Royal Bank of Scotland survey of 56 central banks, released in January, found that nearly 70 percent had increased exposure to the euro, and 52 percent had reduced dollar holdings. But that doesn't mean a destabilizing sell-off is coming. Japan and China together hold 60 percent of global foreign reserves, and have no intention of allowing a sharp fall in the dollar that would damage the value of their holdings. Moreover, as Tokyo is part of the G7 gentlemen's agreement not to sell one another's currency without permission, "Japan has made it very clear that diversification is not going to happen," says Jesper Koll, chief Japan economist for Merrill Lynch. China has been gradually diversifying over the past year or so, says Jen, but any big move is out of the question because that would disrupt what Koll calls the great vendor finance relationship: China finances Americans to buy Chinese products and create Chinese jobs. "And who gets hurt when that relationship gets broken? The guy who provides the credit," he says.

Still, last week's panic was a reminder that markets are paying attention to the fallout from bad monetary policy that has kept interest rates low for a long time, fueling U.S. consumer spending, says GFC Economics' Graham Turner, calling it a "critical turning point." The United States is counting on a weaker dollar—but not too weak—to help balance out its boom and its current account deficit with the rest of the world. Jittery markets could trigger a sell-off that nobody wants.

—Karen Lowry Miller

[Colorado-Valley]

If I were China (and most of the rest of the world), I would continue to prop up the U.S. economy for a few more years. Let several trillion more dollars flow out of the U.S., let the neocons lead the country into a few more $100 billion-a-year quagmires, let the Chinese, Europeans, Russians and South Americans have time to build new trade relationships to slowly isolate and bankrupt the U.S. Then let it collapse of its own accord into a low-wage feudal state.

I think most of the world has written the U.S. off as insane, drunk with debt and oil consumption, a pariah that shouldn't be confronted because it still has nuclear weapons.

Perhaps you noticed that the European Union politely listened to Rice and Bush last week about not selling advanced weaponry to China, and then politely ignored them. This is an astounding event, essentially signalling the end of the U.S. as a respected world leader.

The last four years is the worst foreign policy I've ever seen. The U.S. is increasingly bankrupt and one good oil shock away from economic collapse, and it's still trying to bully the world around with an arrogance I haven't seen since Leonid Breshnev presided over the decline of the Soviet Union.

What a disaster ...

[Itch]

So the Japanese made it clear that they won't sell off the dollar? When did they make this clear? Is there some bit of information that would nullify this article?

How the US handles Iran -- which I suspect will ultimately be disastrous, considering the kind of people that are in control of the government -- will be interesting. China, Japan, and the other countries that Colorado-Valley mentioned all have growing energy relationsions with Iran -- the country setting up an oil exchange priced in euros.

So when the US casts its shit over Iran in some way, what would be more important for US lenders: the security of the US economy, or the security of their own economies? Given that these countries have a substantial manufaturing base, wouldn't it be relatively easy to shift to a war-based economy? It seems like these countries are preparing for war. Russia already sells weapons to countries like Venezuela, China, Iran, and more recently, Saudi Arabia. Europe seems to be set on lifting the arms embargo to China. So Europe seems to have a business plan for this.

OPEC and the bankers will have to find a more valuable currency if the dollar continues to fall and oil prices rise, unless they want to lose money. I don't think the people in the article were taking that into consideration.

From how things seem to be going, it seems like chances are good that the US may complete the path to a crumbling economy, and from the looks of this, the humiliation would be immense. I'd hate to see how people around here react to that shit.

[Colorado-Valley]

Russia and China also signed a military pact for mutual defense a few weeks ago.

Chavez in Venezeula announced the other day that it would sell its U.S. refineries, signaling that its oil will now go to China rather than the U.S. He's also likely to start selling oil in euros, as will Iran.

Russia announced a deal to sell 100,000 AK-47s to Venezuela, probably forseeing an attack from the U.S. proxy army in Colombia.

For those paying attention, these are very intense times.

[julianj]

For those paying attention, these are very intense times.

I agree. One thing, "A Gentleman's agreement" made me laugh. I really think that if any G7 govt thought that their economy was going down the toilet, that agreement would last whole microseconds.

[Doly]

I think "permission" in this context means "telling in advance and giving a chance to the other to convince them otherwise".

[smiley]

I agree with the general tone of the article. I don't think Japan and China are in a rush to sell-off their dollar reserves. However one point which is not addressed in this article: will Japan and China engage in new treasury buying?

America creates a lot of new debt every year. The US spends about 2.5 trillion per year, about 600 billion more than it gets in revenues. That gap has to be met by issuing new debt. Someone has to absorb that debt. If not the interest rates will go up, leaving the US in a world of trouble.

The US debt is barely serviceable at the current interest rates. This year, at the current historically low interest rates, 325 billion is needed just to service the existing debt. Just a one percent interest rate rise will push the US budged 80 billion more in the red.

If interest rates start to rise the effects will be dramatic. Rising costs on the outstanding debt will create a larger budget deficit which has to be met by issuing more debt. Issuing more debt will reduce the attractiveness of US treasuries, leading to higher interest rates.

Meanwhile, as more and more dollars are created the value of the dollar will decrease.

So if China and Japan stop buying new treasuries, the dollar will go down regardless of what they do with the existing dollar reserves. I think this should be the key question: will China and Japan continue to buy treasuries?

[stu]

As for China, westerners foolishly think China would not screw the US, because the US is China's biggest customer. They falsely think China is interested in making profits. China cares nothing about money. China wants to be a military power.

My theory is that if you are the worlds leading economic power then you will also be the leading military power.

When you say that that China does not care about money and is only interested in being a military power I can't help but think that this is inaccurate.

For starters their military is nowhere near as powerful as the USAs. If they are going to build it up they will have to make advances in the fields of technology that put America in the shade.

In order to be the worlds leading superpower you have to lead the world in
4 areas.

1. Culture.
2. Military.
3. Economics
4. Technology

It will be a long time before China matches the USA on any of these levels unless there is a major or sudden decline in the USA economy.

I see you mention that China is getting this knowledge cheaply by exchanging it for it's goods.

From what I see the Chinese economy is doomed in the next few years anyway.

They currently experience blackouts because they cannot meet the demands for energy and if the experts are right and PO happens by the end of the decade then it will just exacerbate the problem.

[Ferretlover]

Tee-hee-hee giggled the the peanut...

http://www.berkshireeagle.com/Stories/0 ... 66,00.html

Notice how quickly the director of South Korea's central bank ate his words when his offhand remark about diversifying his currency portfolio cause a sell-off of dollars on Tuesday, rattling stock markets on three continents. Nobody wants that. That's why the looming economic crisis the pundits are all wringing their hands about -- if the dollar went into free fall, if the Chinese quit buying treasury bonds, if the U.S. economy stalled and sent the world economy into the tank -- is less likely than they think. The more the dollar falls, the more bonds the Chinese buy to defend the value of their investments and keep their number one customer happy. The U.S. is still the world's largest economy, and for now, there's nowhere else for the money to go.

[Chuck]

Difficult for me to judge it on it's merit (as I'm not an economist, thank god), but

The Decoy of the Falling Dollar

http://www.financialsense.com/editorial ... /0227.html

It is a mistake to look at the falling dollar as the result of the profligacy of the American consumers, and a direct outcome of the American trade deficit. This is just a decoy. Admittedly, it is a clever one as far as decoys go. It is designed to divert attention away from the real culprit, which is the yen carry-trade and its obscene profits

[Kingcoal]

My thoughts exactly. The article doesn't mention peak oil, however. That is the achilles heal of the dollar. Peak Oil will force the world economy into recession (Americans quit buying), which will force China and Japan to make some hard business decisions. In other words, when Americans stop consuming their goods, those countries will have no reason to keep propping up the dollar.

[airstrip1]

Difficult for me to judge it on it's merit (as I'm not an economist, thank god), but

The Decoy of the Falling Dollar

http://www.financialsense.com/editorial ... /0227.html

It is a mistake to look at the falling dollar as the result of the profligacy of the American consumers, and a direct outcome of the American trade deficit. This is just a decoy. Admittedly, it is a clever one as far as decoys go. It is designed to divert attention away from the real culprit, which is the yen carry-trade and its obscene profits

This is an interesting article but any arbitrage between Japanese and US interest rates carries a risk. If a speculator borrows a set amount in yen at 1.5 % rate of interest and invests the sum in dollar bonds yielding 4-4.5% he is relying on the relative value of the two currencies staying comparable. Any sudden drop in the value of the dollar assets would make the yen loan more difficult to repay. This trade is fine all the time the Japanese central bank can be relied upon to intervene in the market to prop up the value of the dollar. However, if for any reason that support should fail then there is going to be the mother of all crashes. The whole set up still looks like a house of cards to me.

[tokyo_to_motueka]

Peak Oil will force the world economy into recession (Americans quit buying), which will force China and Japan to make some hard business decisions. In other words, when Americans stop consuming their goods, those countries will have no reason to keep propping up the dollar.

I think this is a VERY good point. Remember this is the ultimate pyramid game. These dollars, used to buy Chinese, South Korean, Japanese and Taiwanese goods, are worthless IOUs. These wothless IOUs (cash dollars) are then exchanged for worthless US govt treasuriy bonds. The US economy is getting the biggest free ride in history due to its ability to print dollars at will. They can only do this because the dollar is the world's reserve currency.

So what is the most likely trigger for the collapse of the pyramid? A serious cut in US consumption as the result of $80 + oil is a pretty reasonable guess, IMO.

[tokyo_to_motueka]

On this topic, I would highly recommend everyone read "Last Orders For The US Dollar?" (March 1, 2005) by Marshall Auerback on PrudentBear.com

The obvious answer in such circumstances would be to restrain US consumption. But were Americans to begin to significantly pare their debt burdens, aggregate demand would likely collapse and trigger something not unlike what Fisher described in the 1930s.