Dollar facing 'power-shift': analysts

[spursncowboys]

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Dollar facing 'power-shift': analysts
Oct 11 03:18 PM US/Eastern
The dollar's position as the world's leading reserve currency faces increased pressure as the financial crisis allows emerging economies greater influence on the world stage, analysts said. A report last week in The Independent claiming that China, Russia and Gulf States are among nations prepared to ditch the dollar for oil trades has heightened the uncertainty surrounding the US currency's future.
The dollar slumped against rivals last week in the wake of the British daily's controversial report.
"The US dollar is being hurt by the continued talk of a shift away from a dollar-centric world," said Kit Juckes, an analyst at currency traders ECU Group.
"Three conclusions stand out very clearly. Firstly, the shift in economic power away from the G7 economies is continuing. "Secondly, there is a growing acceptance amongst those winners that one consequence of this power shift will be to strengthen their currencies.
"And finally, as long as the US economy is not strong enough for any rise in interest rates to be conceivable for a long time, the dollar's underlying downtrend will remain in place," added Juckes.
The Independent, under the front-page headline "The Demise of the Dollar", reported last Tuesday that Gulf states, together with China, Russia, Japan and France, were considering replacing the dollar as the currency for oil deals.
"In the most profound financial change in recent Middle East history, Gulf Arabs are planning -- along with China, Russia, Japan and France -- to end dollar dealings for oil," wrote The Independent's Middle East correspondent Robert Fisk.
They would switch "to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar," added Fisk, citing Gulf Arab and Chinese banking sources.
The report was denied by a host of countries, including Kuwait, Qatar and Russia, while France dismissed it as "pure speculation."
Even so, the United Nations itself last week called for a new global reserve currency to end dollar supremacy, which had allowed the United States the "privilege" of building up a huge trade deficit.
UN undersecretary-general for economic and social affairs, Sha Zukang, said "important progress in managing imbalances can be made by reducing the (dollar) reserve currency country's 'privilege' to run external deficits in order to provide international liquidity."
Zukang was speaking at the annual meetings of the International Monetary Fund and World Bank, whose President Robert Zoellick recently warned that the United States should not "take for granted" the dollar's role as preeminent global reserve currency.
Meanwhile at a G20 summit in Pittsburgh last month, world leaders unveiled a new vision for economic governance, with bold plans to fix global imbalances and give more clout to emerging giants such as China and India.
Following the summit, US Treasury Secretary Timothy Geithner repeated Washington's commitment to a strong dollar.
But last week the finance chief was left to watch as traders used The Independent's report as an opportunity to push lower the troubled US unit.
The report "has helped concentrate the minds of traders and investors alike, and has given them another excuse to take the dollar lower," GFT Global Markets analyst David Morrison told AFP.
"Despite what the Fed and other central bankers say, a weaker dollar is desirable because it is necessary to rebalance the global economy.
"As long as the decline is gentle and orderly, then they're happy. But aggressive selling would spook the markets," he added.
Commerzbank currency analyst Antje Praefcke agreed that the market's reaction was significant because it showed that the dollar was on a downward trajectory.
"The questionable article in the Independent was of course disclaimed," Praefcke said.
"It is nonetheless an interesting study of the pscychological factors which are currently putting pressure on the dollar. Even if conspiracy theories turn out to be nonsense, the dollar is subsequently able to retrace only some of its losses."

[George Gervin's Afro]

It's Barak Hussein Obama's fault!

[spursncowboys]

It's Barak Hussein Obama's fault! You reuse your material huh?

[Wild Cobra]

Well, I think the dollar falling down against foreign currencies is the best thing that can happen to this nation. Especially since the current congress and executive can only makes things worse for our trade balance otherwise.

[Winehole23]

Well, I think the dollar falling down against foreign currencies is the best thing that can happen to this nation. Care to explain how?

[admiralsnackbar]

Care to explain how?

I'd like to hear this, too.

[hater]

start getting used to it:

http://seeker401.files.wordpress.com/2009/03/chinese-envelope-money-100-yuan.jpg

[RandomGuy]

This is going to start putting a LOT of pressure on the Chinese to let their currency rise against the dollar. This is not political pressure, but financial pressure.
Not the intentional kind, but more akin to the kind of pressure that massive floodwaters put on a dam.
The ability of any central governement to hold a currency peg (fixed trading amounts of one currency for another) is very limited, when the entire free-market starts acting against you, as the Chinese are beginning to realize.

[RandomGuy]

It will happen fairly soon, and it will start becoming something of a boon to US manufacturers.

Between a weaker dollar, and the higher oil that will entail, that makes for some interesting policy choices for the Fed.

I see the end result being that the Fed will raise interest rates sooner than they would like, and many expect.

This has the smell of "stag-flation" to me. I think that we are importing Chinese inflation along with everything else, with the implacations that will entail.

[Winehole23]

I see the end result being that the Fed will raise interest rates sooner than they would like, and many expect.

This has the smell of "stag-flation" to me. I think that we are importing Chinese inflation along with everything else, with the implications that will entail.Definitionally, we're talking about unemployment and inflation rising simultaneously, and the most obvious result of raising interest rates too early would be to derail the nascent technical "recovery" and tip the US economy back into recession: the dreaded double-dipper.

What else do you see in the picture, RG?

[LnGrrrR]

This is going to start putting a LOT of pressure on the Chinese to let their currency rise against the dollar. This is not political pressure, but financial pressure.
Not the intentional kind, but more akin to the kind of pressure that massive floodwaters put on a dam.
The ability of any central governement to hold a currency peg (fixed trading amounts of one currency for another) is very limited, when the entire free-market starts acting against you, as the Chinese are beginning to realize.

This.

Now, I'm no economist, so take anything I say with a handful of salt. But it seems China's just bluffing in order to make us look bad; if China gets pegged as the next international standard it will severely limit their ability to artificially keep their exchange rate low.

[LnGrrrR]

Well, I think the dollar falling down against foreign currencies is the best thing that can happen to this nation. Especially since the current congress and executive can only makes things worse for our trade balance otherwise.

It will be horrible short-term; but I could see your point about potential positives if this prevents China from keeping the yuan low in order to export more items, as it would allow American manufacturers to compete. Of course, those that are barely making it now would be screwed royally...

[admiralsnackbar]

This.

Now, I'm no economist, so take anything I say with a handful of salt. But it seems China's just bluffing in order to make us look bad; if China gets pegged as the next international standard it will severely limit their ability to artificially keep their exchange rate low.

Problem with this is it doesn't behoove the Chinese for us to look bad: if our currency devalues, our purchasing power goes down, and the major fire in their economic furnace cools off. On top of this, if their products stop being affordable to Americans, Americans may begin manufacturing their own goods (think of the Buy American campaign in the early 90's, but writ large) in an effort to bolster the economy. Finally, a weaker dollar means a less valuable debt they hold over us.

Anyway, sum total: they have too much money invested in us to make it worth their while to make us look bad.

[Winehole23]

Problem with this is it doesn't behoove the Chinese for us to look bad: if our currency devalues, our purchasing power goes down, and the major fire in their economic furnace cools off.Ours, too.


On top of this, if their products stop being affordable to Americans, Americans may begin manufacturing their own goods (think of the Buy American campaign in the early 90's, but writ large) in an effort to bolster the economy.This is what WC seems to be focused on. He seems to think it's all the better that our standard of living be sacrificed on the altar of competitiveness and wants it to be official US policy.


Finally, a weaker dollar means a less valuable debt they hold over us. This is a perilous path. It requires us to weaken our own purchasing power, while flirting with functional default. I don't like it. All sorts of mischief, domestic and foreign, await us there.


Anyway, sum total: they have too much money invested in us to make it worth their while to make us look bad.It would seem so, but if there is a concern the US is in for an even more chaotic collapse in the near future, it would be in China's self-interest to diversify its reserves even more quickly and even to allow the Reminbi to appreciate; what China might lose in a shrinking trade surplus with the US, short term, in the long run would be offset by the "seigniorage" gained by being part of the basket of currencies soon to replace the USD as the global currency reserve. Besides, emerging economies are already rising to absorb the Chinese "savings glut."

[RandomGuy]

Definitionally, we're talking about unemployment and inflation rising simultaneously, and the most obvious result of raising interest rates too early would be to derail the nascent technical "recovery" and tip the US economy back into recession: the dreaded double-dipper.

What else do you see in the picture, RG?

I see US health care costs continuing to rise at a pace faster than overall inflation for the rest of my life, while wages stagnate somewhat.

US standards of living will only really start rising when the rest of the world starts even remotely catching up in absolute terms.

After WW2, we got waaaay out ahead of the pack, and when trade started freeing up, the obvious re-deployment of manufacturing was unstoppable.

That put some really big downward pressure on wages in the US for a lot of reasons.

Personally I have always seen health care as a huge priority, and have said so here on numerous occasions.

I seriously think that nationalizing health insurance is pretty much the only way to seriously cut costs and force systematic changes that need to be made on the private health care system.

The US won't do that due to the sheer hysteria on the right about this, and we will shamble on until the system is on the verge of total collapse, if at all.

Personally, I have started to seriously look into emigrating to Norway. Cold, but with enough oil wealth, and a liberal (fiscally conservative) goverment.

[admiralsnackbar]

Ours, too.

This is what WC seems to be focused on. He seems to think it's all the better that our standard of living be sacrificed on the altar of competitiveness and wants it to be official US policy.

This is a perilous path. It requires us to weaken our own purchasing power, while flirting with functional default. I don't like it. All sorts of mischief, domestic and foreign, await us there.

It would seem so, but if there is a concern the US is in for an even more chaotic collapse in the near future, it would be in China's self-interest to diversify its reserves even more quickly and even to allow the Reminbi to appreciate; what China might lose in a shrinking trade surplus with the US, short term, in the long run would be offset by the "seigniorage" gained by being part of the basket of currencies soon to replace the USD as the global currency reserve. Besides, emerging economies are already rising to absorb the Chinese "savings glut."

All good points, particularly your last -- I hadn't thought of it that way.

[RandomGuy]

Oddly enough, living standards in the US will only really, truly rise again when the rest of humanity has some basic, minimal standard of living.

It is in our most urgent national interest to improve the lot of the rest of humanity. Exactly how that is to be best accomplished, is the trillion dollar+ question.

[RandomGuy]

It would seem so, but if there is a concern the US is in for an even more chaotic collapse in the near future, it would be in China's self-interest to diversify its reserves even more quickly and even to allow the Reminbi to appreciate; what China might lose in a shrinking trade surplus with the US, short term, in the long run would be offset by the "seigniorage" gained by being part of the basket of currencies soon to replace the USD as the global currency reserve. Besides, emerging economies are already rising to absorb the Chinese "savings glut."

http://www.economist.com/opinion/displayStory.cfm?story_id=14587027

A bubble in Beijing?
Oct 8th 2009
From The Economist print edition

Not yet. But China will soon look dangerously frothy unless policymakers allow the yuan to rise

HAS the world got a new bubble economy? A rising chorus of foam-spotters believes so. Their argument is simple: to support demand, China’s government has created huge quantities of credit. That lending is leading to unsustainable asset-price inflation, while wasteful investment is producing oodles of excess capacity. As a result, China’s stimulus will inevitably be followed by a bust down the road (see article).

...

[angrydude]

the chinese are NEVER going to unpeg that currency any time soon. And if in the even they do really just move away from the dollar they'll probably just peg it to something else. One of the biggest reasons they have it like that is for cultural reasons. The Chinese are savers not spenders--and why wouldn't they be. There are still craploads of them alive and well who suffered in poverty through the peak of communism.

And to all of you saying this will be good for American exports, you don't shoot yourself in the foot to run faster. You get rid of the weights you placed around your neck. America places tremendous tax burdens on businesses. these need to come down. To make up the revenue they could increase taxes on personal income for the mega rich, I don't care.

[Wild Cobra]

Well, I think the dollar falling down against foreign currencies is the best thing that can happen to this nation. Especially since the current congress and executive can only makes things worse for our trade balance otherwise.

Care to explain how?
I have explained it before. As this thread goes, you guys seem to understand for the most part where I go with this.

It will happen fairly soon, and it will start becoming something of a boon to US manufacturers.
Yes, as the dollar weakens, import from Japan, China, etc. will be more expensive. Manufacturing will return to the USA.

Between a weaker dollar, and the higher oil that will entail, that makes for some interesting policy choices for the Fed.
I wish the high oil wasn't a reality, but it is. That's the magor drawback to the dollar dropping.

I see the end result being that the Fed will raise interest rates sooner than they would like, and many expect.
Why? This I don't understand.

This has the smell of "stag-flation" to me. I think that we are importing Chinese inflation along with everything else, with the implacations that will entail.
I don't believe that for a moment. As soon as capitalists see the need for manufacturing here, they will build and employ people. One aspect of such endeavours is to be the first, the leader. Not a follower.

This.

Now, I'm no economist, so take anything I say with a handful of salt. But it seems China's just bluffing in order to make us look bad; if China gets pegged as the next international standard it will severely limit their ability to artificially keep their exchange rate low.
Better them than us.

The currency exchange rate is part of why we have problems. As long as China holds our money instead of converting it to their currency, or others, it's a ticking time bomb. At some point, the bomb will go off. Better sooner than later. The more time that passes, the bigger that bomb gets. It's already big enough to consider WWIII over. If we wait, it could be unavoidable.

It will be horrible short-term; but I could see your point about potential positives if this prevents China from keeping the yuan low in order to export more items, as it would allow American manufacturers to compete. Of course, those that are barely making it now would be screwed royally...
I see it as hurting a little, but I wouldn't say horrible. It's minor compared to what we are going through now.


This is what WC seems to be focused on. He seems to think it's all the better that our standard of living be sacrificed on the altar of competitiveness and wants it to be official US policy.
Letting your imagination run wild I see.

No. It will improve our standard of living in a few short years. Right now, we have too many unemployed. Too many people loving off the taxpayers. Not enough high paying jobs. Bring back jobs, and supply and demand will increase wages and put more people to work. Part of our employment problem is the jobs being outsourced. We need to fix this one way or another.

This is a perilous path. It requires us to weaken our own purchasing power, while flirting with functional default. I don't like it. All sorts of mischief, domestic and foreign, await us there.
Only of overseas sources. The only thing we really need is foreign oil. Most everything else, we can supply ourselves, and put people back to work.

It would seem so, but if there is a concern the US is in for an even more chaotic collapse in the near future, it would be in China's self-interest to diversify its reserves even more quickly and even to allow the Reminbi to appreciate; what China might lose in a shrinking trade surplus with the US, short term, in the long run would be offset by the "seigniorage" gained by being part of the basket of currencies soon to replace the USD as the global currency reserve. Besides, emerging economies are already rising to absorb the Chinese "savings glut."
I'd hate to be China, holding on to all that money as it's value goes down. They are in a catch-22 also. As they convert dollars to the RMB, the value of the dollar drops, and they get less and less as they sell. Just like selling stocks. Still, I think it's better that they start selling now and drop our dollar than wait for the dollar to drop, and sell at even less!

[RandomGuy]

the chinese are NEVER going to unpeg that currency any time soon. And if in the even they do really just move away from the dollar they'll probably just peg it to something else. One of the biggest reasons they have it like that is for cultural reasons. The Chinese are savers not spenders--and why wouldn't they be. There are still craploads of them alive and well who suffered in poverty through the peak of communism.

And to all of you saying this will be good for American exports, you don't shoot yourself in the foot to run faster. You get rid of the weights you placed around your neck. America places tremendous tax burdens on businesses. these need to come down. To make up the revenue they could increase taxes on personal income for the mega rich, I don't care.

1) They have essentially already removed most of the peg, but their "basket" is still probably dominated by the dollar. They will loosen that wieghting as time goes by, I'm sure.

The Chinese have a very vibrant history of being merchants. One reason that they don't invest more is that they have little opportunity to do so.

A weak dollar will be good for exports. If you don't understand that, I'm not sure how I can explain that to you, but I will try a simple scenario.

I make chairs for export. They cost me $100 to make, and sell in Europe at current exchange rates, for EU120, which comes out at an arbitrary made-up exchange rate to $150. My competitors in Europe, my export market, make the same chair for Euros equivalent to $110, and sell the same chair for EU120, making $40 profit.

This exchange rate is 4 euros per 5 dollars

I keep $50 profit, my european competitor keeps $40 (in euros)

Now the dollar gets weak. The exchange rate now goes to 3 euros per 5 dollars.

My costs to make the chair have not changed. $100
What price can I sell my chairs and still make my $50 profit?

150 dollars, divided by 5, is 30 times 3 is EU90. I can cut the price of my chairs in Europe by 25% and STILL make the same profit. My european competitors can't do that. I can actually cut my price to EU100, make MORE profit per unit, and STILL be cheaper than my competitor's european made chairs.

I will not only sell more chairs that way, I will make more profit on each one of those chairs, when I exchange my euros for $$.

That is why a weaker dollar will help US exporters.

[RandomGuy]

I see the end result being that the Fed will raise interest rates sooner than they would like, and many expect.


Why? This I don't understand.

Falling dollars mean higher prices for imports, and higher prices for oil, which is mostly imported.

Higher prices = inflation, a Very Bad Thing from the Fed's perspective.

What does the Fed do when faced with inflation pressures? Raises interest rates.

The underlying cost of energy, especially oil/coal/gas energy drive inflation greatly, because we use so much energy, and the costs of energy are so wrapped up in everything we buy/sell/consume.

You can duck the effects of that inflation pressure by using less energy, or moving to energy sources that don't depend on the wild swings of fossil-fuel prices. (renewables, nukes)

We are being faced with, for the first time, demand for energy far outstripping our capacity to drill/mine/extract fossil fuels, due to simple depletion factors.

The first nation that moves away from fossil fuels for energy needs in a big way will get an ENORMOUS competitive advantage for its manufacturers. Austria and Iceland spring to mind immediately.

[velik_m]

WC, just because imported goods rise up in prices doesn't mean people will start to buy more domestic (USA) goods, they will buy some more domestic stuff, but overall they will just buy less.

I don't think counting on european market is such a good idea, the situation here is currently not much better. Funny thing is, stuff is cheaper in USA as it is. Most manufacturers just use the same price for Europe, they just use Euros instead (1$=1EUR)
:pctoss.

[Wild Cobra]

Falling dollars mean higher prices for imports, and higher prices for oil, which is mostly imported.

Higher prices = inflation, a Very Bad Thing from the Fed's perspective.

What does the Fed do when faced with inflation pressures? Raises interest rates.

First two, yes. Third one, it depends on the source of the inflation. I disagree with your analysis. I say the rates will not rise over this. They are too low anyway. As long as they don't jump too much, I don't care if they rise a little.

[MannyIsGod]

As much as I hate to say it, WC has probably the best post in here.

[RandomGuy]

First two, yes. Third one, it depends on the source of the inflation. I disagree with your analysis. I say the rates will not rise over this. They are too low anyway. As long as they don't jump too much, I don't care if they rise a little.

Care to bet?

Inflation = higher interest rates.

Very simple cause and effect.

They may do something like monkey with the money supply and have done so, but interest rates are the preferred method of reining in inflation for the Fed.

[xrayzebra]

Well, I think the dollar falling down against foreign currencies is the best thing that can happen to this nation. Especially since the current congress and executive can only makes things worse for our trade balance otherwise.

It can only hep by increasing our export trade. But first you have to have
something to export. And we have just about stopped all manufacturing
of goods in this country. Consumer goods. We still have some heavy
goods that could help our trade deficit.

But remember something. We import a good portion of our food supply
anymore and most of our consumer goods. So, cost of living it going to
go up considerably.

And printing money like we will have to do soon, to support our
governments spending, is going to really hike the cost of living and
inflation rate.

Why do you think money people are hunting for places to put their money.
It isn't just in gold you know.