More dollar deliberations<http://ftalphaville.ft.com/blog/2009/07/01/60001/more-dollar-deliberations/>Posted by *Izabella Kaminska* on Jul 01 19:13.
Wednesday’s dollar dive (as illustrated below by the movements of the dollar index) is, according to some reports, being put down to yet more rather non-dollar friendly signals from China. [image: Dollar index - CNBC] Specifically, Reuters reported <http://www.reuters.com/article/usDollarRpt/idUSLAG00356720090701>that China has now asked to debate proposals for a new global reserve currency at next week’s Group of Eight summit in Italy. From Reuters: A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: “Any country at the meeting can raise issues they see fit.” “But whether there is a specific mention in the communique remains open,” said the European source, adding that sherpas would discuss this further in preparatory talks on Friday. The question though remains, what possible alternatives exist? For example, while the euro may look an attractive option, there really isn’t the issuance of high-quality paper to satisfy the sort of supply China would be looking for in terms of investment. Furthermore, any flight to euro-denominated assets would only strengthen the euro, an outcome the ECB and European governments would heartily seek to avoid in the current environment. In short, it’s not in Europe’s interests to try and attract those flows, and it makes no sense to encourage them by beefing up issuance. The other option being pitched, of course, is expansion of the IMF’s special drawing rights (SDR) basket to include the Chinese renminbi, the Brazilian real and even other commodity currencies like the Russian rouble, the Canadian and Australian dollar. This, on account of the above, makes much more sense for Europe, as it opens up a whole new weightings game in global reserves. While the euro would still strengthen versus the dollar in this scenario, it wouldn’t lift the euro too much beyond where it stands now in terms of other global currencies. But even here there is a limit. There are only so many SDRs<http://ftalphaville.ft.com/blog/2009/04/02/54411/soros-gets-his-way-with-the-g20/>. Accordingly, the biggest and best diversification tactic for the time being, or at least until the US position on inflation is clear, will be an ever growing switch into commodities. RGE’s Nouriel Roubini, for one, has recently<http://www.rgemonitor.com/roubini-monitor/257169/the_chinese_proposal_for_a_new_global_super_currency>cast his attention on the phenomenon. Regarding the position of the dollar-surplus holding countries and their concerns over the prospective inflationary debasement of the dollar, he noted:..they will not sit idly waiting for this to happen: they are already diversifying into gold, into resources (as China purchases mines and energy, mineral and commodity resources all over the world) and into shorter term maturity US Treasuries that have less market risk than longer term Treasuries. With two-thirds of US Treasuries, being held by non-residents and the average maturity of such government debt down to 4.5 years, the risk of a refinancing crisis and disorderly fall in the dollar will increase over time unless the US presents a credible plan for medium term fiscal consolidation. But what’s really interesting is Roubini’s reference to how inflation is becoming increasingly justified as a US policy tool and means for solving the crisis. In other words, the notion that inflating one’s way out of the crisis makes perfect sense and should even be encouraged. As he put it (emphasis FT Alphaville’s): Increasingly it is clear that unless such reduction in fiscal deficits occurs the incentive to continue monetizing them will increase. In the short run such massive monetization has not been inflationary as money velocity has collapsed and as the slack in goods and labor markets is still rapidly rising. But over time - late 2010 and 2011 - deflationary pressures will lead to an increase in expected inflation and then in actual inflation if monetization of persistently large fiscal deficits continues. Indeed some in the US argue that wiping out the real value of public debt and dealing with the private sector debt deflation through a bout of double digit inflation may be the most desirable way to reduce the overhang of public and private debt. *While such arguments have many flaws as inflation will have serious collateral damage one cannot rule out that the US will use inflation and depreciation as a way out of its public and private debts. *Greenspan’s concerns about the long term inflationary effects of large US budget deficits - expressed today in a FT op-ed - go along the same lines. Thus, our creditors’ nervousness about the eventual debasement of the US dollar has some increasing validity. In which case, it’s no surprise the likes of China are getting jittery. -- Best Regards, Jay Shah "Expect The Unexpected" --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. 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