Don’t cry for the dollar, yet

September 18, 2009

agnes1– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

It looks bad for the dollar, but looks can be deceiving.

Its sharp decline in the last week has pushed the euro to its highest level in a year and reignited fears that there’s only one place for the dollar to go, and that’s down.

Rhetoric from influential investors like Warren Buffett as well as big foreign buyers of U.S. debt like China and Russia has fed that sense of doom.

Then there’s the yen-like role of the dollar as the funding currency, which is casting a pall over the buck since the longer the Fed keeps a lid on interest rates, the longer the pressure stays on the currency.

Yet the dollar is still the No. 1 currency stashed in reserves around the world, by a long shot. International Monetary Fund data showed the dollar accounting for 65 percent of total allocated reserves in the first quarter.

That means there’s only so far you can push the currency before the self-interest of the world’s savers kicks in to support the buck.

First a little perspective. The dollar’s decline this year mirrors the rise in risky assets like U.S. junk-rated corporate debt that have returned to valuations seen before Lehman Brother’s implosion. Just as credit markets shut down and money poured into safe-haven U.S. Treasuries, the dollar soared as currency investors viewed it as a place to hunker down until the storm passes.

It may still be cloudy, but investors have been confident enough to venture back into riskier territory like emerging markets, which are booming.

That’s meant less money for U.S. assets. Recent data from the U.S. Treasury confirmed as much when it showed net foreign capital outflows of $97.5 billion in July, up from the exit of $56.8 billion in the previous month.

The Fed’s zero-bound interest rate policy has also turned the dollar into a funding currency, where investors borrow in the low yielding dollar and invest in nations that offer juicier returns.

“The dollar is selling off because we have low interest rates. That’s a macro fact,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

Yet, unlike the Japanese yen, which also served as a funding currency earlier this decade, the dollar, or rather dollar-denominated assets, continues to be sought after by nations with big reserves like China and Japan.

Brown Bothers Harriman notes that China snapped up $21.5 billion of such assets in July while Japan added $19.25 billion. Russia and Brazil, which are also sitting on stockpiles of reserves, trimmed their holdings by a relatively small amount.

This is significant. Earlier this year, China and Russia spooked currency markets when they began talking about the need for an alternative to the dollar for the world’s currency reserves.

Such an alternative would help savers like China better protect the value of their assets should the dollar fall out of favor, as it is now. Yet it could take years if not decades to implement.

That means the dollar is still the only game in town, rightly or wrongly, which should provide some comfort to those fearing the worst — a dollar in freefall without a net.

26 comments

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“That means the dollar is still the only game in town, rightly or wrongly, which should provide some comfort to those fearing the worst — a dollar in freefall without a net.”The dollar is the only game in town because it’s used to purchase oil from OPEC. therefore requiring nations to hold it in their reserves, thus creating demand for the dollar. When the price of Oil goes up, the dollar goes down (takes more dollars to buy the oil), . Seems like a false sense of security, all we need to fear is a giant oil bourse.

Posted by Jason | Report as abusive

Agnes how much were you paid to say that it will take decades.You should read more white paper report from yes the UN, IMF and the G20.It’s alot closer than your telling. Next week or someday in the near future we’ll all wake up to the news that yes it devalued by G20 decree.

Posted by GIL | Report as abusive

I have funny feeling Agnes works for one Bernanke.Nevertheless Ms Crane said some truth in ‘only game in town’. It is impossible to dislodge such a dominant currency from its pervasive role in a matter of a few years. It is also the only currency backed by the US military. [No it can't win wars anymore but it can make life difficult for would-be troublemakers.]The Fed and its Wall Street cronies know that well. That’s why they have been reckless, irresponsible, hegemonic. They know they can get away with it, for a while. All those trillions pumped out to save the skins of their cronies at the expense of everybody else. The Fed and Treasury basically said to the world: So we are a bunch of hypocritical Madoffoso fake-capitalists. What are you going to do about it?No much in the short term. But plenty over the longer term. The anger towards the US imperial Ponzi is such that step by stop and with great determination, the world will teach the US a lesson in humility and responsibility.The US dollar must be kicked out of its dominant reserve, trading and funding role within a decade.

Posted by The Real Deal | Report as abusive

Printing money like there\’s no tomorrow. That will drive the value of any currency into the ground.

Posted by Floyd Flanagan | Report as abusive

u’re right; i don’t know what those 2 ignoramuses are crying about. she’s not pro-B , she’s anti-B, just like all rational people of the world are. U’re the ones who received something in return for ur snide remarks.. Go fishing or something and hook up some dirt

Posted by j buck | Report as abusive

Start crying for *your* dollar.What Ms Crane isn’t telling you that every time the gov’t starts up the printing presses and prints off another trillion dollars, the purchasing power of the money in *your* wallet and retirement account will diminish. Since the U.S. went off gold standard in 1971, the U.S.$ now has the purchasing power of what 10 cents purchased in 1971. You’ve lost 90% of your money if you just stuffed it in your mattress or deposit box.The purchasing power of the U.S.$ is evaporating and Ms Crane thinks everything is ok. With projected trillion dollar deficits over the next 6 years, the dollar will take a pounding. When foreign countries realize the U.S. can never pay off their existing debt, they will switch to a different currency. Right now the U.S. is only paying interest on the debt and even then they are having a problem doing just that. No one is buying 30 year gov’t bonds any more so they are forced to sell 2 year t-bills. These will reset with a much higher interest rate when inflation kicks in. Now they have to print more money to pay off the higher interest rates which increases inflation even higher. This is a death spiral of the U.S. economy and the flushing sound you hear is the economy, or what’s left of it, going down the drain. In a few years there won’t be any money left for social security or health care.Maybe Ms Crane doesn’t realize that the $700 billion dollars that Bernanke got from Congress to get rid of the toxic assets on the bank’s books didn’t really go to geting rid of the toxic assets. The toxic assets are still there!! That bubble is still festering and all it needs is a pin to pop it.All of that funding that was suppose to help home owners cope with their mortgage payments, well, it only got to 10% of the home owners who applied for it. The banks aren’t lending out the taxpayer’s money they got from the gov’t.The stimulus package the gov’t spent to get people spending again, well that didn’t work. People aren’t spending because they are worried about losing their jobs. Speaking of jobs, one of the reasons the U.S. is in this mess is because it allowed its manufacturing jobs to go overseas. Now when we buy something at Walmart, our dollar goes back to China and it is their standard of living that gets improved while ours gets diminished. All of the spending that is going on in China is built on foreign dollars, a lot of it American. China’s economy is thriving because it can manufacture and export goods. The U.S. has turned into a service oriented economy and you can’t export services. There are more Americans working for the 3 levels of gov’t than in all of manufacturing. Without manufacturing the economy is dead. Stick a fork in it.Speaking of bubbles, did you know another one is coming? The commercial real-estate bubble will burst within 12 months because those mortgages will reset and with the economy the way it is, many companies can’t afford to pay the higher mortgages and will have to shut down laying off even more people. Unemployment is a lot worse than the gov’t lets on. They don’t count people that have given up looking for work or people that were self employed and are now out of a job. But they will count an executive who used to earn 6 figures who now works at McDonalds.In the past 2 weeks the Chinese gov’t has urged its citizens to start buying gold and silver for the very first time. I wonder why? It is easier to buy gold and silver in China than it is in America. Americans are placated into thinking the toilet paper they have in their wallets is worth something and they will be the last to discover something is wrong with their fiat currency.The calamity that will befall the U.S. will happen as swiftly as all other fiat currency failures. Just look what happened to Iceland and Argentina. The U.S. is the world’s largest debtor nation and is impossible for it to dig itself out of this hole. The American people are in debt up to their eyeballs. They are not saving money. The U.S. cannot manufacture their way out of this mess because their manufacturing jobs are all overseas. Not even iPods are made here anymore. The government refuses to raise taxes because they will get voted out of office so their only “solution” is to print more money which will continue to destabilize the U.S. currency.The writing is on the wall. If Ms Crane decides to ignore it then her 401k won’t buy her diddly squat when she retires.

Posted by Slardy | Report as abusive

Congratulations to Agnes Crane, So sad to see evryone rushing to the edge to dump the Dollar, especially that last remark saying ” the US dollar must be kicked out of its dominant reserve” – wake up buddy in your haste to support China, Russia & India you may live to regret it – your personal jealousy of America is clouding your judgement – good luck with your new currency – I am sure China and the ie are going to look out for your interests ! Heck they are te only currency in theorld that can have a fixed rate pitted againt the American dollarand the world says nothing – I for one do ot want to live in a world where the likes of China or Russia have control of the worlds monetary system – so quick we are to throw the baby overboard arn’t we! wake up people!Big business have sold their soul to China, then our Governments then you!

Posted by betty brandon | Report as abusive

I concur to a point; however, you did not discuss the real issues longer term with the dollar. Any fiat currency is tied ultimately to its country of origin’s health…in this case our country the USA. The unprecedented debt buildup coupled with an obvious paradigm shift from West to East that is taking place and is quite obvious to see when you visit Shanghai and Singapore (to name two polar opposites on that side of our planet) is very real. The untold story is the “artificial” (and thereby undeserved) reasons why the dollar has not collapsed yet. But then that does not soothe the worries of the masses, does it? China,Japan and the Middle East who hold our currency in their vast reserves will be the first to exit when they can…trust me. So, placing eggs in their baskets, so-to-speak, reminds me of the saying “keep your friends close but your enemies closer”…not too comforting longer-term. It’s situational, not substantive…the reasons why the dollar holds up for now. That’s a problem and my fellow citizens need to know the entire story so please try to go deeper and give some more context (avoid ancedotal-ism and sounding topical). ThanksChris

Posted by Chris | Report as abusive

That means the dollar is still the only game in town, it’s so sad knowing you have to option loss or loss moreOption 1You keep you dollars with a 10% deficit and a 10% unemployment hooping some sort of magic well save the day and the US economy deficit and unemployment go down, but more important you ignore the fact that every graphic shows resources divided among people are diminishing which means prices are going up.Fact in 1999 6,000,000,000 people in 2009 6,700,000,000 11.5% more, Resources did not grow as muchAnd you do not add in to the equation the fact the worlds gdp is growing at an average 4 % a yearOption 2You have no option 2

Posted by josh | Report as abusive

What is often forgotten is that the rest of the world wants the dollar to be strong and not weak. This psychological force will prevail in the long run and will ultimately determine the value of the dollar.

We have hit the wall!These are not mere “predictions.”The UN- G-7 China, France, India, Russia, Brazil and others are already laying plans to replace the U.S. dollar as the world’s reserve currency — and this will crush what little international demand remains for the greenback and send it into its death spiral.The U.S. dollar and every other major paper currency — will soon be gutted of its value by decree. There is simply no other way out.Gutting the dollars value is the ONLY hope to service our massive debt.The trap has been sprung. You will simply awake one morning to discover that your money buys only a fraction of what it did 24 hours earlier.

Posted by Dibro | Report as abusive

Anges:Girl you are watching way too much Cramer!If you realy believe the hype go ahead and long the dollar,PS:I saw a great price on camping equipment and pop-up tents.

Posted by Dibro | Report as abusive

for years the US administration is howling that the Chinese currency is overvalued. a devalued/devaluing $ corrects this situation. the Day will come when it is more profitable to produce a clay pot, a bicycle or even a T-shirt in the US than half way around the world and ship to the US and sell it here. With all the rightful concerns about our budget deficits we seem to have taken our trade deficit for granted. That change of course requires a lot of policy changes and a lot of belt tightening – but the alternative is far less desirable- an IMF bailout of the USA.

Posted by Eddy Spoke | Report as abusive

Why keep something long term that is essentially worthless and has long lost the trust of the world?

Posted by Antiagnes | Report as abusive

While reading this article, the theme song to,”All in the Family” started sounding off in my head. While China tells its people to buy precious metals, I’m making sure my non-perishable food supply is well stocked. When the spit hits the fan and it will, all the gold in the world isn’t going to fill your children’s belly. I’m longing for the days of my parents’ bomb shelter!! It’s a very pathetic world in which we live, created by greed and sloth. This way will not be able to sustain itself. My advice, and you get what you pay for, stock up!!

Posted by Mike | Report as abusive

I don’t think there is any doubt the US is no longer going to be the world economic powerhouse it once was. We now have the Euro as a second option and no doubt there will be more “reserve currencies” to follow in the years to come. But I also have no doubt the US will remain a major player in the worlds economy, it just won’t be the only one.

Posted by Dean | Report as abusive

Realignment of exchange rates in currency= balancing of global current accountsJust like the Smithsonian Agreement 1971= This time it’ll be called Warhol Agreement 2009

Posted by GIL | Report as abusive

Facts:1. Fed budget deficit next 10 yrs estimated at $9 Trillion2. Chinese largest foreign holder of debt at 0.8 Trillion3. Social Security holds 2.3 trillion in debt4. Social Security has bought half the debt last 7 years5. Social Security may be debt seller as early as next yearQuestions:1. Who will buy $9 Trillion in debt? (Ans: big risk takers)2. How bad will our deficit and economy get when interest rates are double digit in order to sell 10 year debt at junk bond rates to big risk takers?Conclusions:1. Watch 10 year Fed auctions for signal of the crash.2. Watch how much debt is monetized (purchased with printed dollars) by the Federal Reserve as an option – creating hyper-inflation along with the high interest rates.3. Since we know that the current administration is going to increase rather than decrease our federal deficit, how can we survive until 2012?4. The main stream of the American People (the silent majority) may be naive but they are not stupid. To quote Howard Beale – “They are mad as hell and not going to take it anymore”!

Posted by Jack van Kinsbergen | Report as abusive

I feel bad for AGNES. The commentary just belies her smartness. Please come to sense.

Posted by M.N.Meah | Report as abusive

Why would the dollar fall “without a net?”Assets and human resources in the USA are tremendously high technology and productive, and valuable… in any currency.If the dollar falls, it will only make us more attractive in world affairs, as we export more and import less. Still, the most significant problem we have is government over-spending. It’s not a fundamental problem, it is an elective problem, a luxurious habit. To the extent we have problems, they are because we are so strong we haven’t needed to correct them yet.

Posted by Jim | Report as abusive

The dollar has been there before and done that before, and made a comeback strong enough to turn the tide in WWII, including fund most of the Allied nations and their armies. And then forgive there debts, plus finance the rebuilding of many of the nations of Europe and Asia whether ally or enemy.This is a speedbump in a long and winding road.You might notice that very few of the nations who speak of replacing our currency even suggest that their own might be a suitable replacement.

Posted by Sternberg | Report as abusive

Cry for the dollar? Not likely.Now more than ever before, it’s only money.

Posted by The Bell | Report as abusive

Gil: “Realignment of exchange rates in currency= balancing of global current accounts”. Short and sweet, maybe we could add ‘financial and capital accounts’ too.Unless I missed something, a currency is simply a commodity or inventory, its price subject to supply and demand.There are in fact overtures of replacing the $ – the IMF ‘One Reserve Currency’ and the Chinese, as immature as their economy is. The former will drive conspiracy theorists nuts, so would the latter. The middle way would be to consolidate regional timezoned currencies, into, say six. Due to self interests and the all the complexities involving central banks, diplomacy and treaties, that will carry us through to beyond 2020, unless everybody decides to sell their dollars in one go.Its like the global warming argument, if Yellowstone blows its top, it will be global freezing.

Posted by Casper | Report as abusive

http://www.businessday.co.za/Articles/Co ntent.aspx?id=82105:“If they can find a serious increase in consumer demand, that would help. We don’t really understand why the Chinese savings rate is so high, but it’s probably due to” large precautionary savings. He warned that any decision by China to diversify its currency reserves away from the dollar would “hurt Europe and Japan the most”.Explain that to me.

Posted by Casper Lab | Report as abusive

Hey, Reuters News Service Editors-Is it spelled Brown Bothers Harriman? Someone forgot the ‘r’in Brothers while they were busy trying to resuscitate the dollar.

Eventually, we will get an entirely new currency: the Amero dollar. This will happen when Mexico, the United States, and Canada become one country. It will preclude the New World Order. Don’t believe me? Then read the NAFTA report at your local library.

Posted by Mufaso | Report as abusive