Wednesday, November 7, 2007

URGENT! The Economic Roundtable II

Ladies and Gents:

Let's get right to the point.


Throughout all of my writings, such as this piece, I emphasized that when the world, and especially China and Japan, began to diversify out of the U.S. Dollar, it was time to get worried.

That time... is NOW.

Kudos to the reader who directed me to this article:

Dollar Slumps to Record on China's Plans to Diversify Reserves

By Agnes Lovasz and Stanley White

Nov. 7 (Bloomberg) -- The dollar fell the most since September against the currencies of its six biggest trading partners after Chinese officials signaled plans to diversify the nation's $1.43 trillion of foreign exchange reserves.

The New York Board of Trade's dollar index dropped to 75.21 today, the lowest since the gauge started in March 1973. The U.S. currency declined more than 1 percent against the euro, yen, Canadian dollar and Swiss franc, and almost as much against the British pound and the Swedish krona, the basket's components.

``The main reason for the very sharp move is the comment that China could further diversify out of dollar holdings,'' said Teis Knuthsen, the Copenhagen-based head of foreign-exchange, fixed-income and derivative research at Danske Bank A/S, the Nordic region's second-biggest lender. ``Further weakening of the dollar is very likely...''

Very likely indeed!

The Fed, so long as we are on the fiat money standard, and so long as We the people stand ready to bail out the banks and the hedge funds, will have no choice but to cut rates even further, which will cause the dollar to fall in turn.

``We will favor stronger currencies over weaker ones, and will readjust accordingly,'' Cheng Siwei, vice chairman of China's National People's Congress, told a conference in Beijing. The dollar is ``losing its status as the world currency,'' Xu Jian, a central bank vice director, said at the same meeting.

Ladies and gentlemen...

That says it all right there. Our credit card is about to be turned off. writes:

The dollar collapsed completely tonight in Asian and early European trade after Cheng Siwei, vice chairman of the National People's Congress stated that China should invest its nearly $1.5 Trillion of FX reserves in stronger currencies. The FX market instantly interpreted the remarks as a sign that the Chinese will begin diversifying their currency assets away from the greenback and as a result the dollar reached record lows against the euro, hitting 1.4705 in morning London trade. It fell materially against the pound as well taking out the 2.10 level.

Collapsed completely, because of a few words from a high level official. It's come to this. This is yet another reason why we need Gold: no foreign official can talk down the price of Gold. It is what it is, and you either have sufficient Gold reserves, or you don't.

Also, in response to a comment made that we should be on a Bi-Metallic (fixed ratios of Gold to Silver) system, I would encourage the reader to read Ron Paul's The Case For Gold. In the work, Congressman Paul explains why he does not support a bi-metallic system. It's worth reading.

Back to Dailyfx:

Although, Mr. Siwei has a history of making broad economic comments that often do not reflect actual policy, and although the National People’s Congress is not involved in directly setting currency targets, today reaction speaks volumes about the extent of anti-dollar sentiment present in the FX market right now. The price action in the dollar is uniformly bearish, as currency traders fear that the problems in housing and finance sectors will drag the US economy into a recession in 2008, while the rest of the world will continue to expand and perhaps even tighten its monetary regimes.

While the article tries to calm already jittery investors, it's pretty clear that FX traders aren't taking any chances, and neither can we. Whatever plans you may have in the works... now is the time to EXECUTE!

In addition, we shouldn't expect our international friends to save us, as they have to raise their shields against the hyperinflation that may be in our very near future.

We are on our own.


Today the markets saw more evidence of that decoupling thesis as Reserve Bank of Australia raised its overnight rate to 6.75% despite the fact that the country is facing a Federal election at the end of the month. Governor Stevens noted that inflation has exceeded the central bank’s target and decided to act expeditiously. suggesting that further hikes may be in the offing. It is precisely this type of stark difference between the easing monetary policy of the Fed and the continued hawkish posture of US’ s major trading partners that has helped to produce the current round of dollar weakness.

This is because as interest rates rise, the currency of the high interest rate nation normally appreciates, as investors demand more of the currency in search of higher returns.

In an ideal world, other countries could lower rates in order to help the dollar out. But, so much paper money has been printed (especially US Dollars) that such a move is highly unlikely.

Tomorrow all eyes will focus on the ECB press conference with President Trichet facing a very tough decision. Given their recent rhetoric European monetary authorities clearly want to raise rates by 25bp before year end, as inflation in EZ exceeds the ECB self imposed target of 2%. However, with EURUSD already trading at 1.4700 Mr. Trichet risks the possibility of pushing the pair to 1.5000 should he hint at a December hike. That in turn is likely to elicit howls of protest from EZ finance ministers who fear that the current currency regime will undermine the region’s economic recovery. If Mr. Trichet balks and holds rates steady, the EURUSD may finally embark on long overdue correction.

In other words, non action from the ECB would help bail the dollar out. It seems that central banks worldwide are reaching a point where the manipulation of monetary policy is losing its effectiveness, as the ECB has already injected billions of Euros in order to prevent subprime chaos from wrecking the global economy.

I would go so far as to suggest that our ECB President knows that he's damned if he does, and damned if he don't. We'll see what happens.

In the meantime:


Damn, guess I have to be an even BIGGER financial junkie as events unfold!


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