The US Dollar

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The US Dollar

Postby Byrne » Fri Dec 01, 2006 9:01 pm

From http://www.guardian.co.uk/usa/story/0,12271,1356743,00.html

US risks a downhill dollar disaster


Larry Elliott
Monday November 22, 2004
The Guardian

George Bush's foreign policy is simple: don't mess with America. The same, it appears, applies to economic policy as well. On Friday, the dollar fell sharply against the euro. That was unsurprising, since the downward lurch followed comments from Alan Greenspan which - by his own cryptic standards - were unambiguous.

"It seems persuasive that, given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said. This was hardly a novel statement for the Federal Reserve chairman but the timing was interesting. It came on the eve of a meeting of the G20 - a conclave of developed and developing nations - in Berlin at which the recent fall in the dollar was a hot topic.

Moreover, it came three days after John Snow, US treasury secretary, poured cold water on the idea that the world's central banks might get together to arrest the dollar's fall. The history of "efforts to impose non-market valuations on currencies is at best unrewarding and chequered", he said in London.

Alarmed

Europe got the message. Eurozone policymakers are growing increasingly alarmed about the fall in the value of the dollar, since it threatens to choke off exports - the one area of growth in the 12-nation single currency zone. They would like nothing more than to wade into the foreign exchanges in concert with the Fed and the central banks of Asia to put a floor under the greenback, but they know that Washington has no interest in such a move.

Joaquin Almunia, Europe's monetary affairs commissioner, said last week: "The more the euro rises, the more voices will start asking for intervention. It has to be a coordinated effort but it seems that our friends across the Atlantic aren't interested."

That sums things up rather nicely. There are two reasons why the Bush administration is not willing to play ball with the Europeans. The first is that it sees a lower dollar as inevitable given that the US current account deficit is running at $50bn-plus a month. A lower dollar makes US exports cheaper and imports dearer.

According to this interpretation, the Americans are now simply bowing to the inevitable. Stephen Lewis, of Monument Securities, says the markets have finally lost patience with the laxity of Washington towards the twin trade and budget deficits, pumped up by cheap money and tax cuts. "The truth is that the US fiscal and monetary excesses, which have been essential to keeping the global economy afloat in recent years, are no longer tolerated in the foreign exchange markets," he said. "The status quo is not an option. The only question is how the pain of adjustment will be apportioned."

The second reason is that the Bush administration has neither forgotten nor forgiven France and Germany for the stance they adopted over Iraq. Jacques Chirac and Gerhard Schröder weren't interested in helping the US to topple Saddam, and now it's payback time. If the European economies are suffering as a result of the weak dollar, why should the US care? What's happening in the currency markets is simply American unilateralism in a different guise.

In the short term, therefore, the dollar looks like a one-way bet. City analysts are already talking about it hitting $1.35 against the euro, and given the tendency of financial markets to overshoot, nobody would be that surprised if it fell to $1.40 over the coming months. A smooth and steady decline - which is what Snow is trying to finesse - would do little damage to the US economy, but it would hit Europe hard.

This might seem perverse, given all the fuss there was when the euro was falling against the dollar immediately after its launch. Then, however, the problem was one of credibility for a fledgling currency because the impact of a weak euro was to boost demand for European goods. With a strong euro, there will be a direct impact on European exporters. Given that the latest figures show that Germany and France both grew by only 0.1% in the third quarter, a sharp drop in exports could quite easily push the eurozone's biggest economies back into recession.

Growth forecasts for the eurozone - already modest - are likely to be scaled down over the next few months, and budget deficits are likely to get bigger. A fresh downturn could prove the death knell of the stability and growth pact, which would be no bad thing, and higher unemployment would intensify resistance among workers to structural reform of the eurozone economies.

Washington may have another reason - apart from getting its own back - for allowing the Europeans to suffer. The US is desperate for the Chinese to revalue the yuan, but has so far utterly failed to get Beijing to agree to abandon its dollar peg. The Chinese, for political as well as economic reasons, are determined to resist American pressure.

Europe - the French, in particular - have influence in China. As one analyst noted last week, China has never been censured by the United Nations security council - even over the massacre in Tiananmen Square - because Paris has always vetoed any such moves. France, so the theory goes, might have more success in persuading the Chinese to revalue than the Americans have had.

It has to be acknowledged, however, that you would be hard pressed to find a financial analyst who believes Snow is capable of this level of sophistication. After his performance in London last week, one said: "I would sell the currency of any country of which he was the finance minister." The likelihood is that even if the Americans were to use the Europeans as a proxy, the Chinese would still resist. Certainly, all the evidence is that China's central bank is still intervening aggressively to keep its currency stable. Without that action, the dollar's fall in recent days would have been even more rapid.

Talking the dollar down is easy enough, but the strategy depends on a smooth descent that boosts US growth without scaring off the overseas investors who fund the twin deficits. Should it turn into a disorderly rout then there would inevitably be a spillover into other markets and into the real economy.

Washington, in other words, is relying on a soft landing for the dollar. History shows, however, that there is a better than even chance of this process ending in a full-scale crisis, as it did in the mid 1980s, when the weakness of the dollar culminated in the stock market crash of 1987. And that, of course, was at a time when the G7 was acting in concert. As Lewis said, the crisis could be triggered by a seemingly minor event, as when the Nigerians precipitated the run on the pound in 1976 by switching into dollars.

The US is happy to go it alone for now, since this is the forex equivalent of the quick push to Baghdad. Life is likely to get tougher later - and when it does, multilateralism will have its attractions.
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Postby Byrne » Sun Dec 10, 2006 6:07 pm

http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2006/12/07/do0702.xml&sSheet=/opinion/2006/12/07/ixopinion.html

Economic storm brewing in America

By Ambrose Evans-Pritchard
Last Updated: 12:01am GMT 07/12/2006

America's stock markets typically start crumbling four months before each recession, anticipating the crunch in profits. Shares then grind relentlessly down for 10 months or so until they have on average knocked 26 per cent off the S&P 500 index, Wall Street's listing of top companies.

So if you think the US property slump is looking scary after October's 9.7 per cent drop in new home prices, it may be time to take a little money off the table. It has been a lucrative autumn rally, but the four-year bull market is long in the tooth by any standards.

As we report today, the rate of insider stock sales by company directors on both sides of the Atlantic is the highest since records began 20 years ago, with sales outnumbering purchases by 60:1.

It makes scant difference whether your shares are on Wall Street or the London Stock Exchange. The FTSE 100 index is a global play these days. The lion's share of profits come from overseas, while London's AIM market has become a bet on Chinese and Russian companies nesting there by the dozens.

The world economy is what matters, and I don't like the smell of it. Nor, apparently, does Hank Paulson, who made $700 million at Goldman Sachs before taking over the US Treasury this year. He has reactivated a crisis team with a command centre in Washington to cope with the "systemic risk" in a market melt-down. His worry? 8,000 unregulated hedge funds with $1.3 trillion at hand, and derivative contracts now worth $370 trillion. "We need to be very careful here," he said.

A well-sourced article in Washington's Weekly Standard says Mr Paulson fears a "serious crisis that would be a body-blow to the US economy".

Yes, China is booming – for now – but it accounts for just 4 per cent of world consumption. The great US shopping extravaganza is six times bigger, and remains the anchor of the international system. It is slowing fast, unsurprising after 17 interest rate rises from 1 per cent in June 2004 to the current 5.25 per cent. "Big ticket" orders for cars, aircraft, computers and such plummeted 8.2 per cent in October.

Average house prices have fallen from $244,000 in April to $221,000 last month, with more violent corrections in Florida, Arizona, and New England. Builders have warned of a "death spiral" as they slash prices to off-load a glut of unsold homes.

The "happy handover" orthodoxy of the International Monetary Fund is that America will escape with a shallow slowdown. Asia and Europe will pick up the growth baton. The world will march on without missing a step.

Nice if you can get it. The more ominous possibility is that America fails to recover quickly, and takes the world with it. Japan already shows signs of stalling. Retail sales have fallen for two months. Far from bursting back to life as expected, it is still teetering on the edge of deflation.

France ground to a halt in the last quarter as the surging euro ate into the country's industrial core. Airbus was humming when the euro was worth 90 US cents. Now it must compete at $1.33, with wage costs in euros set against delivery contracts in dollars. Currency hedges protect for a while, then reality hits.

German industry says $1.40 is the pain limit. It is hard to see what can stop the dollar sliding that far as funds bet on US rate cuts next year. The yield premium that kept the currency aloft earlier this year is about to narrow, perhaps sharply. The central banks of Asia and Russia are sated on dollar reserves. They may not slash their US holdings, but they are unlikely to add either. So who will fund America's deficits?

"The US needs a trillion dollars a year just to stand still," says David Bloom, currency guru at HSBC. Modern financial crises have always begun on the peripheries of global economy, setting off a chain reaction. Mr Bloom says the seizure this time will be at the heart of the system as the dollar buckles, pressing down on the "aorta of capitalism".

So we have a world where the ageing economies of Europe and Japan are too fragile to withstand a dollar slide, yet America needs a weak dollar to cushion its own downturn. Meanwhile, China is holding its currency far below equilibrium. Nobody is doing much to break this impasse. The 1930s come to mind.

The consensus is that America will rebound quickly, averting a sticky end. But it takes two years for rate rises to feed through an economy, so Americans have not yet faced the worst. Nobody knows how US households with record debt will cope with the squeeze. Borrowings rose 8.1 per cent in 2000, 8.6 per cent in 2001, 9.7 per cent in 2002, 11.4 per cent in 2003, 11.1 per cent in 2004, 11.7 per cent in 2005, with no let-up in 2006. Debt payments have reached an all-time high of 13.9 per cent of personal income.

Americans extracted 6 per cent of GDP from their homes last year in equity withdrawals (ie, more debt), mostly to subsidise their lifestyles. This game is up. Professor Nouriel Roubini from New York University says recession is inevitable. "People have been using their homes as their ATM machine, but many are now facing negative equity so there will be a lot of foreclosures. As the housing recession spreads to manufacturing, this is going to lead to a much harder landing than people think."

The bonds markets are alert, even if equities are not. Interest rates on 10-year Treasury bonds (4.46 per cent) have dropped below short-term rates (5.25 per cent) for five months. This is the "inverted yield curve" of satanic fame, flag of recession. Ignore that at your peril.

Whatever happens, the Federal Reserve will come to the rescue. But how soon? The Fed minutes from December 2000 show some governors fretting about inflation long after the danger had shifted to slump. That wily old bird Alan Greenspan silenced them, knowing in his bones that the economy was going over a cliff.

His untested sucessor, Ben Bernanke – burdened with inflationist baggage – does not yet have the credibility to pull off that stunt. Whatever he really thinks, he will have to play by the book. So batten down the hatches for a long storm.
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Postby Byrne » Mon Dec 18, 2006 12:00 pm

http://www.bloomberg.com/apps/news?pid=20601101&sid=awhxEuPg0v8o&refer=japan

Dollar Falls on Concern About Widening U.S. Current-Account Gap

By Agnes Lovasz and Stanley White

Dec. 18 2006 (Bloomberg) -- The dollar fell against the yen on speculation a report today will show the U.S. current-account deficit widened to a record on a flood of imports from China.

The U.S. currency slid on concern the deficit means the country is increasing dollar sales to pay for imports and needs to lure more inflows from abroad to fund the gap. Former Fed Chairman Alan Greenspan on Dec. 11 said the U.S. currency may keep falling until the deficit shrinks. The dollar had its biggest drop in a week versus the euro after his remarks.

``One of the factors weakening the dollar is the current account deficit report today, as we see a resumption of the widening,'' said Monica Fan, head of foreign exchange strategy in London at RBC Capital Markets.

The dollar dropped to 117.85 yen at 7:19 a.m. in New York, from 118.17 in New York late Dec. 15. It also traded at $1.3095 against the euro from $1.3080.

Fan said the dollar will fall to $1.35 per euro by the end of the first quarter. Against the yen, it will be at 115, she forecast.

The U.S. current-account deficit widened to $225 billion from $218.4 billion in the second quarter, according to the median estimate of 39 economists surveyed by Bloomberg. The Commerce Department releases the data at 8:30 a.m. in Washington. The shortfall reached a record $223.11 billion in the fourth quarter of 2005.

The yen gained on speculation Bank of Japan Governor Toshihiko Fukui will tomorrow signal plans to raise interest rates next month.

Fukui Hawkish

``There may be some upbeat comments coming out of the BOJ meeting tomorrow,'' Neil Jones, head of European hedge fund sales in London for Mizuho Financial Group Inc., Japan's second-biggest lender. ``The market is expecting Fukui's comments to be more hawkish, shifting the focus to the possibility of a hike in January. There's increased sentiment towards the yen.''

Jones said investors are closing out some positions betting on the yen's weakening against the dollar and the euro. The yen may rise to 153.80 against the euro and 117.30 to the dollar today, he forecast. The yen recently traded at 154.29 to the euro from 154.58.

The currency has dropped 3 percent since June as the yield disadvantage of Japanese securities prompted investors to send money overseas seeking higher returns. Data released Dec. 15 showed the number of investors betting on the yen's fall more than doubled, prompting concern those bets will be reversed.

Policy Board

The policy board will keep the key rate at 0.25 percent when it ends a meeting tomorrow, according to 41 of 52 economists surveyed by Bloomberg.

Three quarters of 43 economists who gave predictions for January expect the bank to have raised rates by then.

The euro received support from an announcement by Iran, the world's fourth-largest oil exporter. The country will calculate fuel and other overseas revenues in euros rather than dollars, to reduce its dependence on the U.S. currency, the Oil Ministry said.

The dollar has slipped 9.5 percent against the euro this year and may weaken further as oil producers including the United Arab Emirates, Venezuela and Indonesia plan to put more of their funds into the European currency.

``The euro has become, in the five years of its existence, one of the principal currencies of the world,'' said Amelia Torres, spokeswoman for European Union Monetary Affairs Commissioner Joaquin Almunia. She said Iran's announcements she had seen were ``not very clear.''

Gains in the euro may be limited as French Finance Minister Thierry Breton said the ``rapid'' rise of the currency is ``bad for the economy,'' in an interview with the Les Echos newspaper published today.

Business Confidence

Separately, the European Commission said the U.S. economy's slowdown should have only a ``limited'' effect on the expansion in the dozen euro nations. The report said that while the European economy would slow next year after the best performance in six years in 2006, growth would remain robust.

Evidence the euro-region economy is not losing steam may underpin the need for higher borrowing costs by the European Central Bank.

The euro may strengthen before a survey to be released tomorrow that is forecast to show German business confidence stayed at a 15-year high.

Optimism in Europe's largest economy may suggest the region can weather higher interest rates after the central bank raised borrowing costs six times since December 2005 to 3.50 percent. The Federal Reserve's key rate is 5.25 percent.

The Ifo institute's sentiment index, based on responses from 7,000 executives, held at 106.8 in December, according to the median estimate of 43 economists surveyed by Bloomberg News.

``We're looking for the Ifo survey to remain elevated at 15- year highs,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. ``An upside surprise in this number will provide scope for the euro to rally'' to $1.32.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net ; Stanley White in Tokyo at swhite28@bloomberg.net
Last Updated: December 18, 2006 07:25 EST
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Postby Byrne » Sun Jul 15, 2007 3:52 pm

From
http://www.bloomberg.com/apps/news?pid= ... 8E0moWfGEo

Dollar Drops to Record Low Versus Euro on U.S. Growth, Rates

By Min Zeng

July 14 (Bloomberg) -- The dollar fell to a record low against the euro and the weakest in 26 years versus the pound on speculation declining consumer spending will weaken the economy and dim the allure of U.S. assets.

The U.S. currency dropped a fifth straight week against the euro and pound amid growing bets that the Federal Reserve will cut interest rates this year to spur growth. U.S. reports next week are forecast to show a slowdown in housing starts and manufacturing, which may fuel more dollar selling.

``The market sentiment is still to sell the dollar,'' said Jeff Gladstein, global head of currency trading at AIG Financial Products in Wilton, Connecticut. ``There is nothing fundamental to change that direction right now.''

The dollar fell 1.1 percent this week to $1.3782 per euro and reached $1.3814 per euro yesterday, the lowest since the European currency's debut in January 1999. The U.S. currency declined 1.2 percent to $2.0343 per pound and touched $2.0367 yesterday, the weakest since June 1981. Gladstein said the dollar will slide to $1.4 per euro next week.

The U.S. currency also dropped 1.2 percent to 121.93 yen this week and 1.5 percent against the Australian dollar. The Australian dollar rose above 87 U.S. cents yesterday for the first time since February 1989.

Interest Rates

The Fed kept its benchmark overnight rate at 5.25 percent for an eighth straight meeting on June 28. The rate compares with benchmarks of 4 percent in the euro zone, 5.75 percent in the U.K. and 6.25 percent in Australia. Japan's rate is 0.5 percent.

Traders raised bets the Fed will cut rates. The yield on fed funds futures contracts due in December fell to 5.215 percent this week from 5.235 percent a week earlier and 5.26 percent a month ago. The current yield suggests traders see a 21 percent chance the Fed will cut its benchmark to 5 percent by year-end. The probability was 9 percent a week earlier.

Investors also sold dollars after Moody's Investors Service cut ratings on bonds backed by U.S. subprime mortgages this week, while Standard & Poor's threatened to do the same. The moves raised concern that the losses will spread to other securities.

U.S. retail sales last month dropped 0.9 percent, the most in almost two years, after a 1.5 percent increase in May, the Commerce Department said yesterday.

Last Hope

``Retail sales is the piece of data to destroy the last standing hope of dollar bulls,'' said Boris Schlossberg, senior currency strategist at DailyFX.com in New York. ``We are going to see a consumer-led slowdown through the rest of the year, which doesn't bode well for the dollar.''

Fed Chairman Ben S. Bernanke will deliver his semi-annual testimony before the House Financial Services Committee on July 18 and to the Senate Banking Committee the following day.

Manufacturing probably slowed this month in both the New York and Philadelphia areas, according to surveys slated for release next week by Fed banks of the two regions. Housing starts also may have slowed last month, a Commerce Department report may show.

The U.S. also releases monthly inflation data. Consumer prices may have risen at a 2.6 percent annual pace last month, down from 2.7 percent in May, according to the median forecast in a Bloomberg News survey. The government releases the data on July 18.

Break Through

After breaking through barriers related to options trades at $1.38, the euro is now facing more selling, or so-called resistance, at the $1.3830 level, said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.

``We are not going to see an explosive down move in the dollar, it's going to be a slow crawl from now on,'' Kassel said.

The yen advanced from a record low versus the euro yesterday, erasing a weekly decline, after Iran asked Japan's oil refiners to pay for Iranian crude oil in the Japanese currency instead of dollars.

National Iranian Oil Co., known as NIOC, asked the refiners to use the yen exchange rate quoted at the Bank of Tokyo Mitsubishi UFJ Ltd. on the date cargoes are loaded, according to a letter obtained by Bloomberg News. The letter was dated July 10 and signed by Ali A. Arshi, general manager for crude oil marketing and exports in Tehran. The change is ``effective immediately,'' the letter said.

``This will create demand for the yen,'' said Steven Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto. Companies in Japan will ``have to sell dollars to raise money to pay for oil.''

For the week, Japan's currency ended little changed at 168.05 per euro. It touched a record low of 168.95 yesterday.

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net .
Last Updated: July 14, 2007 09:34 EDT
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Postby Byrne » Mon Sep 24, 2007 7:52 pm

From UK's Daily Telegraph
China threatens 'nuclear option' of dollar sales

By Ambrose Evans-Pritchard
Last Updated: 8:39pm BST 10th August 2007

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.

"Of course, China doesn't want any undesirable phenomenon in the global financial order," he added.

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.

The threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent America being "held hostage to economic decicions being made in Beijing, Shanghai, or Tokyo".

She said foreign control over 44pc of the US national debt had left America acutely vulnerable.

Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.

"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said.

A bill drafted by a group of US senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.

The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached $26.9bn in June.

Henry Paulson, the US Tresury Secretary, said any such sanctions would undermine American authority and "could trigger a global cycle of protectionist legislation".

Mr Paulson is a China expert from his days as head of Goldman Sachs. He has opted for a softer form of diplomacy, but appeared to win few concession from Beijing on a unscheduled trip to China last week aimed at calming the waters.
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Postby Byrne » Thu Nov 08, 2007 7:30 am

Sterling hits $2.10 as dollar is dumped
By Richard Blackden
Daily Telegraph (UK)
Last Updated: 1:13am GMT 08/11/2007

Sterling has pushed through the $2.10 barrier for the first time in 26 years after the Chinese government indicated it is prepared to diversify some of its huge foreign-exchange reserves.

The pound stormed to as high as $2.1021 in trading in London, a level not seen since the early Thatcher era, and many currency experts now predict it go higher despite signs that the UK economy is slowing.


China has $1.33 trillion of foreign-exchange reserves
The greenback's renewed weakness was sparked by comments from Cheng Siwei, vice chairman of China's National People's Congress, who suggested China will diversify some of its $1.33 trillion (£660bn) of foreign-exchange reserves.

Mr Siwei told a conference in Beijing: "We will favour stronger currencies over weaker ones, and will readjust accordingly."

Besides sterling, the dollar was down against 14 of the world's 16 biggest currencies this morning, hitting the lowest since the 1950s versus the Canadian dollar, reaching a new record against the euro and its weakest in more than 20 years against the Australian dollar.

Sterling's move higher comes a day before Bank of England Governor Mervyn King and the rest of the Monetary Policy Committee are due to give their latest decision on interest rates.

While the majority of economists expect interest rates to be left at 5.75pc, the surge in the currency is likely to put parts of the country's manufacturing industry under pressure.

The flight from the dollar is helping to fuel oil's assault on the $100-a-barrel mark and investors' appetite for gold, which is denominated in the US currency. The dollar was also hit yesterday by a report that the Fed's loan officer survey reported evidence of an incipient credit crunch across broad reaches of the US economy, with banks tightening lending standards on prime mortgages, auto debt and consumer loans.

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Postby Byrne » Fri Mar 14, 2008 12:28 pm

Last Updated: Friday, 14 March 2008, 11:19 GMT

Dollar slides to fresh euro low


The dollar hit another record low against the euro against as the US currency was undermined by worries over the credit crisis and the US economy.

At one stage it took $1.5651 to buy a euro, a new record, but the dollar did recover from those early lows.

The dollar also fell below 100 yen for the second day in a row.

Investors are concerned that US authorities will not be able to halt the crisis in the US mortgage market, which is hitting banking confidence.

The dollar recovered slightly against the pound sterling on Friday, with $2.0268 needed to buy one pound after nearly touching $2.04 on Thursday.

"The dollar is still very much in a downtrend and it's hard to see a catalyst for the reversal of that," said Jeremy Stretch, strategist at Rabobank.

"The data has been universally negative for the dollar and until this changes, any rallies are going to be tentative," he added.

Rate cuts?

A report on Thursday that showed a fall in US retail sales for February also upset the market.

Economists say it is likely the US economy will fall into recession and that the Federal Reserve will have to keep cutting interest rates.

That encourages investors to switch to their money into currencies that have a higher rate of return.

The next US interest rate meeting is next week and markets are expecting that the benchmark rate will be cut by 0.75% to 2.25%.

In contrast, investors expect the European Central Bank to keep rates unchanged at 4%.

http://news.bbc.co.uk/1/hi/business/7296156.stm
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Byrne - Thank you for this information

Postby slow_dazzle » Fri Mar 14, 2008 12:39 pm

it belongs here because it is an economic issue. I post some stuff about finance/economics but usually into the big thread on the Federal Reserve. Maybe I should start putting some stuff in here as OP's.

The tanking of the dollar is a real puzzle and it's probably beyond our ability to decipher what is really going on. Whatever the answer is Byrne I am now utterly convinced that the west's economies are fubar and that life is going to become very "interesting" as a result. I follow the financial news real close and, although it might just be my perception, the flow of bad news seems to be speeding up and widening out. I mean, a bail out of Bear Stearns????

I still can't get my head around the almost deliberate trashing of the dollar although, it wouldn't be worth much, if it wasn't the de facto reserve currency by dint of it being used for oil transactions.
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Postby Byrne » Sun May 04, 2008 5:31 pm

Iran’s yen for the euro
2 May, 2008, 0458 hrs IST, TNN

Iran, the world’s fourth largest oil producer, has reportedly shifted from the US dollar to euro and yen as currencies in which it will trade its crude produce. This is seen as a major blow to the US dollar as a reserve currency.

Iran’s move may be determined partly because of its ongoing political stand-off with the US. However, that need not be the only consideration to have prompted Iran to shift to the euro and yen. Many oil exporting nations, as indeed other emerging economies accumulating dollar reserves, have been worrying about the structural weaknesses in the US economy and the prospect of the dollar’s long-term decline.

Economists in the US too have voiced such concerns. So a gradual shift away from the dollar assets held by the rest of the world should not come as a surprise. A survey by the US treasury department measured foreign holdings of US securities as of June 30, 2007, to be $9,772 billion. This should easily cross $10 trillion this year, which is about 75% of the US GDP. Of this, $3,130 billion is held in US equities, $6,007 billion in US long-term debt securities, and $635 billion in US short-term debt securities. Mind you, the outstanding foreign holdings in US securities are growing on an average at over 25% in recent years.

Emerging economies are beginning to feel uncomfortable about putting so much in US dollar-denominated assets year after year. Oil exporting countries themselves have about half a trillion dollars worth of US securities today. By designating future oil trading in euro and yen, Iran is clearly trying to diversify its assets by denominating them in currencies other than the dollar.

If other West Asian oil exporters were to do the same, the US or any other net oil importer, will be forced to buy euro and yen to purchase oil from the international market. The power of the US dollar as a reserve currency will certainly fall, to that extent. Indeed, nations holding US dollar assets will have to evolve new strategies to protect the value of their forex reserves as the axis of global economic power shifts rapidly. No one, including America’s arch rivals in the geo-strategic play, would want the dollar to suffer a precipitous decline as it would erode everyone’s asset value. But they must all prepare for a gradual decline, for sure.

The Indian Times
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Living in a world of $200 oil

Postby Byrne » Tue May 13, 2008 5:53 pm

Living in a world of $200 oil

Published: May 9 2008 19:50 | Last updated: May 9 2008 19:50

It is about 125 years since shipping oil in wooden barrels became obsolete. An oil price above $125 a barrel, however, and speculation that the price could hit $200 are reminders that we have become ever more dependent on the black stuff. Oil is unlikely to hit $200 and remain above it any time soon – but economies would suffer if it did.

The underlying reason for oil’s tenfold price rise in less than 10 years is that demand, not least from China and India, has risen rapidly while supply has not kept pace. That dynamic is different to the supply shocks of the 1970s, but because truck drivers and commuters cannot easily stop travelling, even a small deficit in supply can cause large moves in the oil price.

Tight supply and demand have made markets volatile. The spot price of oil for immediate delivery remains above the price for delivery in future months. This suggests particular fear about short-term supplies, while there is some evidence that speculation and worried buyers laying in stocks have pushed up prices. Spot prices could surge or plunge in the short-term, but seem unlikely to return to levels that are low and stable for some time.

Expensive oil has economic effects. Net oil exporters become richer at the expense of net oil importers: Middle Eastern producers can buy more German cars, French clothes and US Treasury bonds in exchange for each barrel. Importers must buy less of everything else in order to keep up their consumption of oil.

Higher oil prices can, but need not necessarily, cause sustained inflation. A rise in the price of oil should be offset by falls in the prices of other goods for which there is now less demand. But if prices do not adjust smoothly, or if workers try to compensate for the cost of oil by demanding higher wages, it can ignite inflation.

Oil-intensive capital equipment may have to be scrapped: the useful life of all of sports utility vehicles, farm equipment and gas-fired power stations, for example, may be shortened. Such shifts cause real economic losses.

So far the world economy has shrugged off higher oil prices. So far the argument has been that, because rich countries now produce far more goods per barrel of oil than they did in the 1970s, a rise in the price does less economic damage. That is correct, but the further the price rises, the less true it becomes. The share of economic output that importing countries must spend on oil has risen dramatically.

For rich countries, the $125 oil price will be a noticeable drag on economic growth; for poor countries, when combined with higher food prices, it will mean more poverty. Oil supply should grow in response but if it does not, $200 oil is just about conceivable. It would cause serious economic disruption, international tensions and currency crises for some poor nations.

Copyright The Financial Times Limited 2008
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Postby Byrne » Tue Oct 06, 2009 7:53 am

The demise of the dollar

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

By Robert Fisk

Tuesday, 6 October 2009

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, moving instead 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.


Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

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The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

http://www.independent.co.uk/news/busin ... 98175.html
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Re: The US Dollar

Postby Byrne » Tue Jan 10, 2012 10:07 pm

According to research outlined in Dr. David Spiro’s book, The Hidden Hand of American Hegemony (1999), it was during this time OPEC began discussions on the viability of pricing oil trades in several currencies. This unpublished proposal involved a “basket of currencies” from the Group of Ten nations, or “G-10.” These 10 members of the Bank of International Settlements (plus Austria and Switzerland) included the major European countries and their currencies such as Germany (Mark), France (Franc), and the U.K. (Sterling), as well other industrialized nations such as Japan (yen), Canada (Canadian dollar), and of course the Unites States (U.S. dollar). 35 It should be noted the powerful G-10/BIS Group of Ten also has one unofficial member, the governor of the Saudi Arabian Monetary Authority, or SAMA.

In order to prevent this monetary transition to a basket of currencies, the Nixon administration began high-level talks with Saudi Arabia to unilaterally price international oil sales in dollars only – despite U.S. assurances to its European and Japanese allies that such a unique monetary/geopolitical arrangement would not transpire. In 1974 an agreement was reached with New York and London banking interests which established what became known as “petrodollar recycling.”

That year the Saudi government secretly purchased $2.5 billion in U.S. Treasury bills with their oil surplus funds, and a few years later Treasury Secretary Michael Blumenthal cut a secret deal with the Saudis to ensure that OPEC would continue to price oil in dollars only. 36

In typical understatement Dr. Spiro noted, “…clearly something more than the laws of supply and demand…resulted in 70 percent of all Saudi assets in the United States being held in a New York Fed account.” 37 Naturally, this arrangement with the Saudi government prevented a market-based adjustment, and was the basis for the second phase of the American Century, the Petrodollar phase. What follows is the extraordinary history in which petrodollar recycling was vigorously implemented during the 1970s.

Recycling Petrodollars


“In May 1973, with the dramatic fall of the dollar still vivid, a group of 84 of the world’s top financial and political insiders met at Saltsjobaden, Sweden, the secluded island resort of the Swedish Wallenberg banking family. This gathering of Bilderberg group heard an American participant, Walter Levy, outline a ‘scenario’ for an imminent 400 percent increase in OPEC petroleum revenues. The purpose of the secret Saltsjobaden meeting was not to prevent the expected oil price shock, but rather to plan how to manage the about-to-be-created flood of oil dollars, a process U.S. Secretary of State Kissinger later called ‘recycling the petrodollar flows.’”

- F. William Engdahl, A Century of War (2004) 38

Beginning in the mid-1970’s the American Century system of global economic dominance underwent a dramatic change. The oil price shocks of 1973-1974 and 1979 suddenly created enormous demand for the floating dollar. Oil importing countries from Germany to Argentina to Japan, all were faced with how to acquire export-based dollars to pay their expensive new oil import bills. The rise in the price of oil flooded OPEC with dollars that far exceeded domestic investment needs, and were therefore categorized as “surplus petrodollars.” A major share of these oil dollars came to London and New York banks where the new process of monetary petrodollar recycling was initiated.

Engdahl’s remarkable book, A Century of War (2004), chronicles how certain geopolitical events mirrored a “scenario” discussed during a May 1973 Bilderberg meeting. Apparently powerful banking interests sought to “manage” the monetary dollar flows that were premised upon what the group envisioned as “huge increases” in the price of oil from the Middle East. The minutes of this Bilderberg meeting included projections regarding the price of “OPEC oil of some 400 per cent.” 39

In 1974 U.S Assistant Treasury Secretary Jack F. Bennett and David Mulford of the London-based Eurobond firm of White Weld & Co set about the mechanism to handle the surplus OPEC petrodollars. 40 Kissinger, Bennett and Mulford helped orchestrate the secret financial arrangement with the Saudi Arabia Monetary Agency (SAMA) that creatively transformed the high oil prices of 1973-1974 to the direct benefit of the U.S. Federal Reserve banks and the Bank of England.

Despite the financial windfall enjoyed by the U.S./U.K banking and petroleum conglomerates who “managed the recycling of petrodollar flows,” most Americans regard the 1973-74 oil shocks as a particularly painful time period of high inflation and long lines at every gas station. In the Third World these high oil prices created huge loans from the International Monetary Fund – debts to be re-paid entirely in dollars.

…now let’s fastforward to more recent events…

On September 24, 2000 Saddam Hussein emerged from a meeting of his government and proclaimed that Iraq would soon transition its oil export transactions to the euro currency. 52 Saddam referred to the U.S. dollar as currency of the ‘enemy state.’ Why would Saddam’s currency switch be such a strategic threat to the bankers in London and New York? Why would the United States President risk fifty years of carefully crafted global alliances with various European allies, and advocate a military attack whose justification could not be proved to the world community?

The answer is simple – the dollar’s unique role of a petrodollar has been the foundation of the dollar hegemony since the mid 1970’s. The process of petrodollar recycling underpins American economic hegemony, which funds American military supremacy.

Dollar/petrodollar supremacy allows the U.S. a unique ability to sustain yearly current account deficits; pass huge tax cuts, build a massive military Empire of Bases around the globe, and still have others accept our currency as medium of exchange for their imported good and services. The origins of this history are not found in textbooks on International Economics, but rather in the minutes of meetings held by various banking and petroleum elites who have quietly sought unhindered power.

U.S. Dollar: Fiat Currency or Oil-Backed Currency?

“What the powerful men grouped around the Bilderberg had evidently decided that May was to launch a colossal assault against industrial growth in the world, in order to tilt the balance of power back to the advantage of Anglo-American financial interests and the dollar. In order to do this, they determined to use their most prized weapon – control of the world’s oil flows. Bilderberg policy was to trigger a global oil embargo in order to force a dramatic increase in world oil prices. Since 1945, world oil had by international custom been priced in dollars…A sudden sharp increase in the world price of oil, therefore, meant an equally dramatic increase in world demand for U.S. dollars to pay for that necessary oil.

Never in history had such a small circle of interests, centered in London and New York, controlled so much of the entire world’s economic destiny. The Anglo-American financial establishment had resolved to use their oil power in a manner no one could have imagined possible. The very outrageousness of their scheme was to their advantage, they clearly reckoned.”

- F. William Engdahl, A Century of War (2004)



As previously noted, the crucial shift to an oil-backed currency took place in the early 1970s when President Nixon closed the so-called “gold window” at the Federal Treasury. This removed the dollar’s redemption value from a fixed amount of gold to a fiat currency that floated against other currencies. This was done so the Federal Government would have no restraints on printing new dollars, thereby able to pursue undisciplined fiscal policies to maintain the U.S.’s Superpower status. The only limit was how many dollars the rest of the world would be willing to accept on the “full faith and credit” of the U.S. government. The result was rapid inflation and a falling dollar.

Although rarely discussed outside arcane discussions of the “global political economy,” it is easy to grasp that if oil can be purchased on the international markets only with U.S. dollars, the demand and liquidity value will be solidified given that oil is the essential natural resources required for every industrialized nation. Oil trades are the basic enablers for a manufacturing infrastructure, the basis of global transportation, and the primary energy source for 40% of the industrial economy.

During the 1970s a two-pronged strategy was pursued by the U.S./U.K. banking elites to exploit the unique role of oil in an effort to maintain dollar hegemony. One component was the requirement that OPEC agree to price and conduct all of its oil transactions in the dollar only, and two was to use these surplus petrodollars as the instrument to dramatically reverse the dollar’s falling liquidity value via high oil prices. The net effect solidified industrialized and developing nations under the sphere of the dollar. No longer backed by gold, the dollar became backed by black gold.

This brilliant if somewhat nefarious act of monetary jujitsu enormously benefited not only the U.S./U.K. banking interests, but also the “Seven Sisters” of the U.S./U.K. petroleum conglomerate (Exxon, Texaco, Mobil, Chevron, Gulf, British Petroleum, and Royal Dutch/Shell). These major oil interests had incurred tremendous debts from the capital requirements in their large new oil platforms in the inhospitable areas of the North Sea and in Prudhoe Bay, Alaska.

However, following the 1974 oil price shocks, their profitability was secure. Engdahl candidly noted “while Kissinger’s 1973 oil shock had a devastating impact on world industrial growth, it had an enormous benefit for certain established interests – the major New York and London banks, and the Seven Sisters oil multinational of the United States and Britain.” 57

The unique monetary arrangement was formalized in June 1974 by Secretary of State Henry Kissinger, establishing the U.S.-Saudi Arabian Joint Commission on Economic Cooperation. The U.S. Treasury and the New York Federal Reserve would ‘allow’ the Saudi central bank to buy U.S. Treasury bonds with Saudi petrodollars. 58
Likewise, London banks would handle eurozone-based international oil transactions, loan these revenue via “Eurobonds” to oil importing countries. The debt and interest from these loans would then flow to the dollar denominated payments to the International Monetary Fund (IMF), thereby completing the recycling of surplus petrodollars back to the Federal Reserve.

..as for Saddam’s switch that led to “regime change”…

Although this little-noted Iraq move to defy the dollar in favor of the euro in itself did not have a huge impact, the ramifications regarding further OPEC momentum towards a petroeuro are quite profound. If invoicing oil in euros were to spread, especially against an already weak dollar, it could create a panic sell-off of dollars by foreign central banks and OPEC oil producers. In the months before the latest Iraq war, hints in this direction were heard from Russia, Iran, Indonesia and even Venezuela. There are indicators that the Iraq war was a forceful way to deliver a message to OPEC and others oil producers, ‘Do not transition from the petrodollar to a petroeuro system.’ Engdahl’s conversation with a forthright London-based banker is rather enlightening:

Informed banking circles in the City of London and elsewhere in Europe privately confirm the significance of that little-noted Iraq move from petrodollar to petroeuro. ‘The Iraq move was a declaration of war against the dollar’, one senior London banker told me recently. ‘As soon as it was clear that Britain and the U.S. had taken Iraq, a great sigh of relief was heard in London City banks. They said privately, “now we don’t have to worry about that damn euro threat.”63

Petrodollar recycling works quite simply because oil is an essential commodity for every nation, and the petrodollar system demands the buildup of huge trade surpluses in order to accumulate dollar surpluses. This is the case for every country but the United States, which controls the dollar and prints it at will or fiat. Because today the majority of all international trade is done in dollars, other countries must engage in active trade relations with the U.S. to get the means of payment they cannot themselves issue. The entire global trade structure today has formed around this dynamic, from Russia to China, from Brazil to South Korea and Japan. Every nation aims to maximize dollar surpluses from their export trade as almost every nation needs to import oil.

This insures the dollar’s liquidity value, and helps explain why almost 70% of world trade is conducted in dollars, even though U.S. exports are about one third of that total. The dollar is the currency which central banks accumulate as reserves, but whether it is China, Japan, Brazil or Russia, they simply do not stack all these dollars in their vaults. Currencies have one advantage over gold. A central bank can use it to buy the state bonds of the issuer, the United States. Most countries around the world are forced to control trade deficits or face currency collapse.

Such is not the case in the United States, whose number one export product is the dollar itself. This unique arrangement is largely due to the dollar’s World Reserve currency role, which is underpinned by its petrodollar role. Every nation needs to get dollars to purchase oil, some more than others. This means their trade targets are countries that utilize the dollar, with the U.S. consumer as the main target for export products of the nation seeking to build dollar reserves.

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