The Demise of The Dollar? - BOLLOCKS!

 

China, Russia and few morons on Twitter who claim to be "experts", are becoming very excited over the alleged demise of the Dollar and the shift to paying for things in the Yuan.

Rest assured, the Dollar isn't going anywhere anytime soon.

Think carefully people, the Euro has been around for a few years now and has barely made a pin prick into the Dollar's tough elephantine hide!

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Trump's Solution For A Strong Dollar - Himself!

Quality shade from Commerzbank in its note titled 'The Trump dollar - an obituary' pic.twitter.com/KWb9Sxrvx5

— Katie Martin (@katie_martin_fx) May 17, 2017

China Makes Play to Replace Dollar With Yuan As Reserve Currency

China offers to world AIIB, BRICs bank, Silk Road, 1 Belt 1Road, RCEP, FTAAP. US had only TPP to balance that. Now gone with Trump #WEF17

— Nouriel Roubini (@Nouriel) January 17, 2017

Xi is making a skilful pitch at Davos #WEF17 to make China the champion of free trade and globalisation, and to replace the Dollar with the Yuan as the global reserve currency.

Financial Armageddon Averted

Contrary to the American version of Project Fear, Trump's victory has not brought about financial Armageddon. Markets around the world are rallying, and the Dollar has stabilised.

The lesson here is that markets go down, and markets go up!

Brexit Armageddon Has Not Occurred

Services PMI Strong, Biggest Jump on Record Ever https://t.co/5Q4iHhV2Dq #DespiteBrexit pic.twitter.com/ULidKiWMOv

— Euro Guido (@EuroGuido) September 5, 2016

SWIFT Wars - America Blinks First

America's attempt to use SWIFT (letting JPMorgan block a Russian payment for Sogaz, part-owned by sanctioned Bank Rossiya) as a means of pressurising Russia into backing down in the Crimea dispute has fizzled out, as America has blinked first.

JPMorgan will now, "following consultation with our regulators", process the payment.

Whilst this little financial skirmish, on the face of it, appears to have fizzled out there will be long term ramifications. Russia and other countries (eg China, those in the Middle East etc) will not accept having their economies threatened by US actions such as this, the Dollar will not remain the reserve currency of the world for much longer.

Bundesbank Repatriates Gold Bullion

The Bundesbank is to repatriate gold reserves held abroad in order to tighten control and combat future currency crises. It will repatriate a large percentage of its holdings from New York and all of its bullion from Paris.

This move signals the demise of the the Dollar as a reserve currency (as the gold stored in the Fed can be pledged to shore up the Dollar), and the resurgence of a quasi gold standard.

The lesson is clear, if you invest in gold do not rely on mere paper certificates to validate your holding.

The Collapse of The Rial - A Warning To The Eurozone

Iran's rial is collapsing, following an "innovation" last week by the Iranian government to supply importers with dollars via an "exchange centre".

Unsurprisingly, people have scrambled to exchange rials for dollars.

Reuters reports that the rial fell by at least 9% today:

"The rial was trading at about 37,500 to the dollar, down from around 34,200 at the close of business on Monday, a foreign exchange trader in Tehran told Reuters. Other Tehran traders said the rial had dropped even further, to 38,000 or 40,000."

The Iranian industry minister, demonstrating a typical politician's lack of understanding of how markets work, said that he hoped security services would root out speculators whom he blamed for the drop.

It would be ironic if the downfall of the Iranian government was brought about, not directly by sanctions or war, but by their lack of understanding of how markets work; ie their own hand.

The bureaucrats of the Eurozone should take note, markets are driven by fear and greed; ill advised attempts to control and manipulate them always end in tears!

The Global Liquidity Bailout

World Central Banks Announce Global Dollar Shortfall Funding Resolution

What does this mean?

It means that at least one country is close to defaulting, and that this mechanism has been put in place beforehand to stop global financial meltdown.

It also means that the central banks have taken away the responsibility for trying to resolve the economic crisis from the hands of the politicians.

Trouble Ahead

The Telegraph reports that central banks and official bodies have "parked" record sums of dollars at the US Federal Reserve for safe-keeping.

For why?

It seems that they have lost confidence in the commercial banks.

Reserve funds from "official foreign accounts" have doubled since the start of 2011, with a dramatic surge since the end of July when the eurozone debt crisis spread to Italy and Spain. 

 

Whilst the amounts are (in relation to the global economy) small ($100BN), the increase serves as an indicator of problems that resemble what happened in late 2008.

To add to the indicators of problems ahead, talks between Greece and a visiting troika of international inspectors (IMF, the European Union, and the European Central Bank) were suspended today.

The talks ended abruptly this morning, as there is some disagreement over Greece's ability to meet its deficit targets.

The troika is expected to return in 10 days time.

The End of The Dollar?

The UN Conference on Trade and Development (UNCTAD) has quite correctly said that the system of currencies and capital rules, which binds the world economy, is not working properly.

UNCTAD blame this systemic failure for the financial and economic crises.

Additionally, UNCTAD have called for a new global currency that replaces the Dollar as a reserve currency.

Given the recent shenanigans in Washington, where the politicians played chicken with the Dollar and the world financial system, it is hardly surprising that the calls for abandoning the Dollar as the global reserve currency are becoming louder. Countries do not want to be held hostage again by the antics of those on Capitol Hill.

Playing Politics With People's Lives - Epilogue

The bill allowing the President to raise the US debt ceiling has finally been passed by both houses.

Crisis over?

No, the markets have reacted badly to the fall in US manufacturing and have been less than impressed with the political antics on Capitol Hill.

Whilst the politicians who brought about this crisis may feel smug and self satisfied, they should bear in mind that US creditor nations such as Russia and China will never trust them again to deal with economic issues such as this in a sensible and rational manner.

As such the long term prospects for the US economy, and Dollar as a reserve currency, are bleak; thanks to the selfish indulgences of the politicians on Capitol Hill.

Breaking News

China rating agency Dagong downgrades U.S. to A+ from A

And so it begins!

The politicians were warned!

Chinese Whispers II

AFP report that the Chinese ratings agency (Dagong Global Credit Rating Co. Ltd.) has stated that, because the USA had allowed the Dollar to weaken, the USA is in effect defaulting on its debts.

In November last year Dagong reduced its rating on the US to A+ from AA, citing a deteriorating intent and ability to repay debt.

The Chinese are far from happy with the weakening of the Dollar, as they hold over $1Trillion in Dollar denominated debt.

This issue will cause considerable friction between the US and China.

Outlook - Stormy G20 Predicted

The atmosphere at the forthcoming G20 summit in Seoul later this week is likely to be somewhat heated, following on from pre summit soundbites issued by the Chinese and then Barack Obama over the recent move by the US Federal reserve to print $600BN (Quantitative Easing 2).

China, and some other countries, are not happy that this tactic pushes the Dollar lower, thus making their exports to the US more expensive and the lessening the value of their Dollar based investments.

Barack Obama responded, during a press conference in India, by saying that QE2 would bring about higher US growth rates which would be "good for the world as a whole". The US is also of the view that the Chinese Yuan is undervalued, and are pressing the Chinese to let it float higher.

The G20 will see an intensification of this "spat", as various countries begin to draw battle lines over possible future "currency wars".

China Gives Markets a Boost

China's announcement that it is to end its two year peg of the Yuan against the Dollar, and effectively to allow a managed rise in the value of the Yuan, has given world stock markets a much needed boost.

Any rise in the Yuan will be gradual, as the Chinese will manage its rise carefully. However, markets have taken the announcement as a sign that China is confident about its economy.

Euro Heads For Parity

The Euro is heading for parity with the Dollar, as markets become increasingly unnerved by:

1 The likelihood of Greece ever repaying its debt

2 The severe austerity packages being introduced in Europe (Italy has just announced a 3 years Euro24BN austerity plan), and

3 The rolling takeover by the Bank of Spain of certain small banks.

Markets, once they build up sufficient momentum, are difficult to stop. The Euro's days may be numbered.

The Domino Effect

Moving on from the diversion of yesterday's budget, most of the contents of which will probably not come to fruition, the Times reports that European economies are gradually being downgraded one by one.

Ireland
Downgraded from AA+ to AA-
November 2009

Greece
Downgraded from A- to BBB+
December 2009

Turkey
Upgraded from BB- to BB+
December 2009

Portugal
Downgraded from AA to AA-
March 2010

This "death by a thousand cuts" is, unsurprisingly, negatively impacting the Euro which fell to a ten month low against the dollar yesterday.

Downgrades make it increasingly difficult for downgraded countries to borrow from the bond markets, without increasing the rates they pay lenders (thus increasing their fiscal woes).

There is of course the possibility of an EU bailout for countries facing ruin. However, that prospect (for Greece anyway) looks rather unlikely given that Chancellor Merkel has called Greece's bluff and suggested that it should go to the IMF (something that Greece has been bluffing it will do).

The economic solution that the EU needs to face, namely expelling Greece, may appear politically unpalatable. However, it is the only solution that will stop the infection spreading.

Betting On Failure

Speculators are taking a punt on the Euro falling further, as the fallout from the EU's inability to resolve the Greek tragedy continues.

The Euro is now at a nine month low against the dollar, on the basis of low expectations about the result of a meeting tonight between Eurozone finance ministers.

The Greek austerity plan, formulated by the European Commission last week, is viewed by many as not being austere enough.

The problem is exacerbated by the fact that Greece has knowingly understated its true problems (ie fiddled its figures), and that the Greek government is unable/unwilling to take the necessary measures at home for fear of a backlash from the voters.

It is quite clear that Greece did not meet the conditions necessary for joining the Euro, ie it joined it on the basis of fraudulent information supplied to the EU.

Dishonesty has a price, as the Greeks are now discovering.

The best solution may well be to let it rot and be pushed out of the Euro, thus ensuring that further bailouts will not be necessary.

Nature Abhors a Vacuum

Unsurprisingly the current political turmoil his hitting the economy. The pound slid 1% against the dollar to $1.6022, a one-week low, while the pound hit a two-week low against the euro of 1.1277 euros.

Nature abhors a vacuum, and until the political situation is brought into some semblance of control KPI's such as the exchange rate will be savaged by the markets.

On a brighter note, well done to Alistair Darling for clinging on to his job as Chancellor.

As to whether is this is a sign of his strength, or the Prime Minister's weakness, is another matter.

The End of Sterling?

Jim Rogers, who co-founded the Quantum fund with George Soros, has told Bloomberg:

"I would urge you to sell any sterling you might have. It's finished. I hate to say it, but I would not put any money in the UK".

In the short term Sterling will undoubtedly fall further (and many people who short it will make fortunes out of its demise). Indeed Sterling today fell below $1.40 to its lowest point in over seven years, because of concerns about the banking crisis and debt levels.

However, currencies strengths are relative. No other developed country will escape the recession. The Euro will, in the not too distant future collapse as the folly of the "inflexible" high interest rate policy of the ECB is laid bare. The Dollar will also fall as America's economy worsens.

Sterling will rise again.