“.. just last week, the United Nations released a report concluding that the dollar should no longer be the world’s reserve currency because it is not stable enough. The dollar is down 5% over the past month, and even currency traders don’t see it as a safe haven any more.”
The US dollar would almost certainly fall to it’s appropriately value if the Chinese yuan were floating or at least allowed to appreciate. There’s no way for investors to run to the “safe haven” of the yuan in a growing Chinese economy so they’re only left with the Euro, the US dollar, and the Yen (to a lesser extent). Both the US dollar and the Euro should be falling against the yuan based on economic, financial, and trade data. Previously the Euro was valued too high so if the US dollar falls the Euro will be valued too high once again because that is where investors will run to. You can’t expect currency markets to follow the rules when not all players are playing by the rules.
The US talks a lot about letting the Chinese currency float. But in fact they take no action. Why? Could that be related to the fact China owns so much of their debt. If you look at the relative health of the US population it also suggest that long term productivity is far from guaranteed.
Add the potential for social unrest in both China and the US and we can’t so sure the picture is all rosy. Indeed, China and the US have become extremely interdependent, but with a market growing and a population 5 time the size of the US, China is likely to come on top. In 10 or 20 years the US will depend on China but China will not need to US anymore. I hope it does not come to that but the risk surely exist.
Undoubtedly, the debt is a potentially catastrophic issue for the US dollar and the US economy. Unless they take control of it they risk loosing their sovereignty.
Central banks start to abandon the U.S. dollar
There’s mounting evidence that central bankers have little faith in the greenback these days. Can we blame them? by Heidi N. Moore, contributor
There are those who would argue that the financial crisis was caused by over-enthusiastic worship of the Almighty Dollar. Call it brutal financial karma, but that church is looking pretty empty these days.
A new report from Morgan Stanley analyst Emma Lawson confirms what many had suspected: the dollar is firmly on its way to losing its status as the reserve currency of the world. We already knew that central banks have preferred gold to dollars, and that they’re even selling their gold for cash; now, according to Lawson’s data, it seems that those central banks prefer almost anything to dollars.
Lawson found that central banks have dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this “unexpected given the global environment.” She adds, “over time we anticipate that reserve managers may reduce their holdings further.”
What is surprising is that the managers of those central banks aren’t buying traditional fall-backs like the euro, the British pound or the Japanese yen. Instead, she suggests they’re putting their faith in other dollars – the kind that come from Australia and Canada. The allocation to those currencies, which fall under “other” in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the U.S. dollar allocation.
Call it diversification, if you must, but the trendline indicates that central banks are finally putting their money where their anti-dollar mouths are. The dollar has been in free-fall since 2007.
Last year, both China and Russia have questioned why the dollar should be the world’s reserve currency. (Naturally, they were advocating for the ruble and yuan).
And just last week, the United Nations released a report concluding that the dollar should no longer be the world’s reserve currency because it is not stable enough. The dollar is down 5% over the past month, and even currency traders don’t see it as a safe haven any more.