Dollar Crisis: THE Story of 2009-2010

As faith in Obamanomics flickers, the U.S. dollar burns

BY DAVID BRADSHAW ~ Editor, Real Money Perspectives
January 2010

The dollar is making new economic headlines daily as the world rushes to find a new reserve currency with a more trustworthy store of value. Meanwhile, the Fed, Treasury and White House are embracing a weaker dollar, while espousing a "strong dollar". These recent news headlines detail what's at stake as the world makes plans to ditch the dollar ASAP.

* Dollar Crisis Looms if US Doesn't Curb Debt: "The U.S. must soon raise taxes or cut government spending to curb its debt, and failure to act will risk a crippling dollar crisis as investor confidence ebbs. The national debt has risen above 50% of GDP (gross domestic product) from 40% two years ago, and within 20 years will blow past a previous record above 100% of GDP set after World War Two without stern official steps," reports Reuters.

* 'End US dollar dominance', urges France: "President Nicolas Sarkozy urged an end to the US dollar's global dominance, warning that its weakness poses an 'unacceptable' threat to European competitiveness. The world is multipolar, the monetary system must become multi-monetary. 'A dollar-based system ... might have made sense in the 20th century but doesn't make sense in the 21th century,' said Prof Stiglitz, an adviser to former US president Bill Clinton," reports AFP.

* Gulf petro-powers to launch currency in latest threat to dollar hegemony: "The Arab states of the Gulf region have agreed to launch a single currency modeled on the euro, hoping to blaze a trail towards a pan-Arab monetary union. The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts. Between them they amount to regional superpower with a GDP of $1.2 trillion, some 40% of the world’s proven oil reserves, and financial clout equal to that of China. "The US dollar has failed. We need to delink," said Nahed Taher, chief executive of Bahrain’s Gulf One Investment Bank," reports Ambrose Evans-Pritchard at Telegraph.

The Dethroning of King Dollar?: "Dollar murdered. Drowned in red ink. Clues point to the White House." So might a tabloid headline read as the angry mourners gathered to affix blame for the end of the era in which the dollar served as the currency in which the world does business -- its reserve currency. Unless Bernanke drains liquidity from the financial system, and shrinks the Fed's balance sheet by winding down $2 trillion in support programs, the dollar's decline will accelerate, shattering confidence in its long-term value," reports The Weekly Standard.

* The Last Great Dollar Crisis: "The more the U.S. becomes financially overextended, the more it is at the mercy of seemingly insignificant financial events. The U.S. has few viable alternatives to deficit reduction and eventually tightening the money supply. If the U.S. government cannot muster the will to rein in the money supply and the national debt on its own, it faces the prospect of a rival power increasingly constraining U.S. economic policy options or a collapse in global confidence in the dollar," reports WSJ.

* Top Analysts See No Bottom Dollar Slump in Dollar Slump: "The most accurate dollar forecasters predict the world’s reserve currency will continue sliding even when the Fed begins to raise interest rates, which policy makers say is an extended period away. 'History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates,' said Callum Henderson, the global head of foreign-exchange strategy for Standard Chartered," reports Bloomberg.

U.S. Backs Strong Dollar; Trading Partners Not Convinced: "The U.S. reiterated its support for a strong dollar Thursday but Pacific Rim trading partners remained skeptical, continuing their calls on Washington to stabilize its sliding currency, languishing near 15-month lows against a basket of currencies. 'They have to make good on what they profess. The volatility is hurting us in a serious way,' Russian Deputy Finance Minister Dmitry Pankin told Dow Jones Newswires," reports WSJ.

China Hints at Departure From Dollar Peg: "China sent its clearest signal yet that it was ready to allow yuan appreciation after an 18-month hiatus, saying on Wednesday it would consider major currencies, not just the dollar, in guiding the exchange rate. China hinted at a shift from an effective dollar peg that has been in place since the middle of last year," reports CNBC.

The Great Shrinking American Dollar: "The American government needs to control its budget deficit to stop confidence in the dollar from falling further. Our government collects far too little in taxes for what it spends. There is no choice but to raise taxes soon and rein in spending. Short-term rates (controlled by the Fed) will stay low, while long-term rates (market-determined and affected by trust in our Treasury and Fed to keep the value of dollar strong) will rise as people fear their dollar investments will be debased," reports NY Times.

Geithner Reaffirms 'Strong Dollar' Importance "U.S. Treasury Secretary Geithner said that maintaining a strong dollar is "very important" for the country's economy, sticking to his mantra on foreign-exchange policy as the U.S. currency continues its broad downtrend," reports WSJ.

Fed Gov Sees 'Orderly' Dollar Depreciation"The U.S. dollar has so far had an orderly depreciation, Fed Dallas President Richard Fisher said when asked about the carry trade on Tuesday. He said he was aware of risks the FOMC ran of fueling the trade by stating the Fed would hold its funds rate at exceptionally low levels for an extended period," reports Reuters.

Three Things To Stop the Dollar's Decline: "Since 2001, four consecutive Treasury secretaries have made 'a strong dollar policy' the cornerstone of their rhetoric on the U.S. currency. Over that period of time, the currency has lost nearly a fifth of its value. Hint to the current Treasury secretary: it's not working. Here are three ways Federal Reserve and the Treasury could stop the dollar's decline without changing current policy too much. #1: Change the rhetoric. #2: Build a credible plan to reduce deficits. #3: Coordinate policy with Europeans and other foreign central banks," reports CNBC.

* G20 leaves door open for fresh pressure on dollar: "We're probably looking at fresh dollar weakness in the short term in the wake of the G20 meeting, said Kenneth Broux, senior markets economist at Lloyds TSB. Finance ministers and central bank governors of the Group of 20 major countries, meeting in Scotland Nov. 7-8, launched a "framework" in which they will discuss how to reduce trade and savings imbalances between nations," reports Reuters.

* Mother of all carry trades faces an inevitable bust: "The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Traders are borrowing at negative 20% rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. The longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating," reports Financial Times.

* Valuing Bonds, Dollar Is Crazy in World Gone Mad: "In price is knowledge," one editor used to scream at me. Not anymore. The ad-hoc combination of quantitative easing, government stimulus packages and zero-interest-rate policies has distorted markets beyond recognition. You know markets have gone mad when the yen is perceived to be a refuge and the dollar is the catalyst of choice for re- inflating a global bubble," reports Bloomberg.

* Let the dollar prove itself - Ron Paul: "The long-term strength of the dollar will only be weakened by maintaining the Fed's monopoly on our monetary system. Our foreign creditors are already moving to dethrone the dollar as the world's currency. The prospect of American citizens also turning away from the dollar toward alternate currencies should provide an impetus to the U.S. government to regain control of the dollar and halt its downward spiral," reports CNN.

* A Dollar’s Worth of Foreign Policy: "How do you catch a falling dollar? A classic approach would be for the U.S. government to stand ready to raise interest rates and adopt plans for future fiscal austerity. It would be responsible, but it would not be much fun, particularly at a time when U.S. unemployment is approaching 10%. Suppose, instead, the dollar continues to slide and loses its premier status among world currencies. There could be domestic political benefits, but it would leave key countries economically bruised and seething," reports Foreign Policy.

* Dollar's fall setting off alarm bells overseas: "The dramatic decline of the U.S. dollar is aiding the American economic recovery but setting off alarm bells overseas, with corporate executives, politicians and pundits calling it among the biggest threats to the rebounds underway in Europe and Japan. Yet analysts say the fall of the dollar reflects a basic economic truth: the U.S. financial situation is no longer as solid as it once was. Rather than being undervalued, many argue that the dollar has room to fall further. The risk remains of a full-blown run on the dollar that could force the Federal Reserve to suddenly raise interest rates, dealing a potentially severe blow to the U.S. recovery. But for now, the weak dollar is one problem the United States loves to have," reports The Washington Post.

* The Dollar Depends on Politicians Now:"The reality is that Mr. Bernanke cannot totally blame politicians. He could do what Paul Volcker did, and raise dollar interest rates to send a message to the market that he will not allow the dollar to be destroyed. But that is not likely to happen. There has been no indication that Mr. Bernanke will raise interest rates anytime soon, much less raise them to the level needed to convince the market that he intends to preserve the purchasing power of the dollar. Sadly, the dollar is no longer as good as gold. It is now only as good as the empty rhetoric of politicians and central bankers," reports James Turk at HoweStreet.

* Weak Dollar Is Protectionist Barrier: "The dollar is likely to continue depreciating and the 'new normal' will see consumers shedding debt in an attempt to balance their books. I think the dollar is an over-owned currency. The Chinese, the Asians have basically owned too many dollars for too long. In the new normal for the world economies, investors will have to get used to a very low return on asset market. The standard of living in the US is likely to go down with the dollar, as we've spent too much over the past 20 years. Let's face it, a lower dollar is basically a protectionist barrier, Bill Gross, the influential manager who runs top bond fund Pimco, told CNBC.

* Devaluing Our Way Out of the Crisis: "Now the policy in the U.S. is to devalue and inflate its way out of the crisis, as the word out of Washington officials such as Treasury Secretary Tim Geithner is that a weak dollar will not only help create more exports, but will restructure the economy permanently towards exports and away from consumer spending. If a weak currency were the way, as John Tamny of RealClearMarkets notes, Argentina would be an economic powerhouse. And to which I would add Zimbabwe would be a superpower," reports Fox Business.

* Dollar to drop further, will hurt UAE: "The dollar will fall further against major currencies. The decline is attributed to the trillions of dollar pumped into the US economy to contain the global financial crisis and which in turn has led to a rise in dollar supply. All indicators show that the dollar continues to fall. The International Monetary Fund along with other organizations believe that now is the best time to depeg from the dollar in the Gulf Co-operation Council said Dr Mohammed Al Assoumi, a Dubai-based analyst," reports Business24-7.

 * Mr. Geithner: Stop Passing The Buck On The Dollar: "To claim that a falling dollar is great because it boosts the earnings of multi-national corporations is tantamount to saying a rise in the number of car crashes would be a wonderful for Americans because they can invest in air bag makers. It looks like the plan the U.S. wants to pursue is to continue to discourage foreign investment, punch our bankers (the Chinese) in the nose and punish those who are savers by crumbling our currency. But please, Mr. Geithner, let's not pretend it benefits anyone except those who are heavily in debt--chief among them our government," reports Forbes.

* What a U.S. Decline Means for Investors: "The dollar's decline is only a symbol of the greater problem. In the investment world, America's importance may be shrinking. According to data tracked by FactSet Research, U.S. companies now account for barely 30% of the value of the world's publicly-listed companies. A decade ago, that figure was more than 50%," reports WSJ.

* Dollar Decline Draws International Protest: "This could end up being viewed as the week when dollar weakness became too much for the rest of the world to bear, setting the scene for tense encounters at the upcoming meeting of G-20 finance ministers. "Some sort of crisis is looking inevitable," said Neil Mellor, a currencies analyst at The Bank of New York Mellon in London. "You can't continue down this road without something giving way, and it's clear that the U.S. is not going to do anything to put meat on the bones of its strong-dollar policy. Most experts agree that unless the dollar's decline becomes much more rapid, U.S. authorities will continue to stand by and let the buck fall. "This is a benign cyclical descent," reports WSJ.

* Why Dollar's Continued Slide May Undermine Global Status: "A weak currency can have serious long-term implications. Imported products become more expensive. The price of oil and other commodities is directly tied to the value of the dollar. Many investors are using commodities as a hedge against dollar weakness. That has sent oil prices sharply higher, creating a drag on the economy. Longer term, a weak dollar gives the U.S. less borrowing power. That makes financing the national debt more expensive, making the budget deficit even worse, and hurting the dollar even more," reports CNBC.

* Dollar hegemony for another century: "The dollar will still be the world’s dominant reserve currency in 2030, sharing a degree of leadership in uneasy condominium with the Chinese yuan. A currency reflects the strength of an economy and society over time. Of course, if the US were stupid enough to enact the 10-year spending plans projected by the White House — with a deficit of $1.9 trillion in 2019 — the country will be ruined. I do not think America has so far lost its senses that it will commit suicide in this fashion," reports London Telegraph's Ambrose Evans-Pritchard.

* Dollar Suicide: "We’re doing it to ourselves. Dr. Bernanke is, in effect, the dollar incarnate — the walking embodiment of the soundness of our currency — if the dollar does die, it will not have been murder. It will have been suicide. Dollars are just like works of art: The more copies there are relative to demand, the less each one is worth. As with Monet, so with money — only Monet has remained scarce and valuable. As the U.S. money stock has continued to explode, the exchange value of the dollar has tumbled," reports National Review.

* The Dollar's Fall: Deal With It: "The dramatic recent fall of the value of the U.S. dollar grabs headlines every day, even as the U.S. stock market surges to new recovery highs. People are talking about a "dollar crisis," So while it may feel like a blow to our national prestige to have the dollar be just another currency, that's probably inevitable — and probably all for the best. So as an investor, what do you do? Buy gold. Gold is the alternative to all currencies, not just the dollar," reports Smart Money.

* Next big political issue? The U.S. dollar: "The state of the dollar probably hasn’t been a first-tier political issue in the United States since, say, the presidential election of 1896. Back then, it manifested as whether or not America would stay on the gold standard or switch to a bimetallic one. A recent Rasmussen poll found that 88% of Americans say the dollar should remain the dominant global currency. They sure think a weaker dollar is a sign of a weaker America. It is just a matter of time before global financial markets reject America's dismal deficit outlook, and that could lead to a punishing dollar crisis," reports Reuters.

* Dollar To Drop 20%: "The dollar will extend its drop versus the euro over the next two to five years, falling as much as 20% to an all-time low under a widening U.S. budget deficit. Policy makers favor the dollar’s slide as a means of supporting a recovery," Harvard’s Professor Niall Ferguson, author of "The Ascent of Money: A Financial History of the World" said to Bloomberg.

* Dollar to Hit 50 Yen, Cease as Reserve: "The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency," Sumitomo Mitsui Banking Corp.’s chief strategist Daisuke Uno said. "We can no longer stop the big wave of dollar weakness. The greenback is heading for the trough of a super-cycle that started in August 1971. After the dollar loses its reserve currency status, the U.S., Europe and Asia will form separate economic blocs. The International Monetary Fund’s special drawing rights may be used as a temporary measure," reports Bloomberg.

* Dollar Decline Must End: "Over the past six months, the dollar has lost 15% while gold has climbed nearly $150. If this continues, spiking inflation and interest rates will choke off the bull market in stocks and do serious damage to the economy. It could happen fast. How to solve this problem? In supply-side terms, cut tax rates for new growth incentives," reports Kudlow at CNBC.

* The Message of Dollar Disdain: "If money is a moral contract between government and its citizens, we are being violated. The rest of the world, meanwhile, simply wants to avoid being duped. That is why China and Russia—large holders of dollars—are angling to invent some new kind of global currency for denominating reserve assets. As the dollar is increasingly perceived as the default mechanism for out-of-control government spending, its role as a reliable standard of value is destined to fade," reports WSJ.

* US policymakers playing with fire as the dollar continues to tumble: "The willingness of foreigners to hold dollar assets has allowed American citizens to consume beyond their means for many years. If the collapse in the MBS market exposed the first chink in American economic armor, a rejection of the dollar as the world's reserve currency could expose an even bigger hole. If other nations begin to believe the US is happy to allow its currency to plummet, they may all head to the exit at the same time. The US is not just playing with monetary fire: it may also be encouraging an epochal shift in the world financial order," reports the Independent.

* Dollar facing 'power-shift': "The US dollar is being hurt by the continued talk of a shift away from a dollar-centric world. As long as the US economy is not strong enough for any rise in interest rates to be conceivable for a long time, the dollar's underlying downtrend will remain in place," reports AFP.

* Russia ready to abandon dollar in oil, gas trade with China: "Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday. 'We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans,' Putin said. Britain's Independent newspaper reported last week that Russian officials had held 'secret meetings' with Arab states, China and France on ending the use of the U.S. dollar in international oil trade," reports Russia's RIA Novosti.

* Obama's peace shattered as dollar takes a pounding: "The divergence between Obama's Nobel honor and the marketplace repricing of his country's future would appear to be a stark lesson in the difference between hope and reality. Hope for Obama's plans may soar, but his ability to meet those hopes is shriveling with the value of the currency," reports Sidney Morning News.

* Dollar Reaches Breaking Point: "The anti-dollar trend is unmistakable. The world is changing, and the dollar is losing its status. World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy. Central bank diversification signals that the currency won’t rebound anytime soon after losing 10.3% the past six months," reports Bloomberg.

* Dollar Adrift: "The Fed will let the dollar fall. For a time in the wake of the panic, the dollar benefited from a flight to the relative safety of U.S. Treasurys and other dollar assets. But as this overall global risk aversion has ebbed, the risk calculus has turned and the dollar itself has become more dangerous to hold than non-dollar investments. If the fall of the dollar becomes a rout, this could cause a spike in commodity prices and jeopardize the nascent economic recovery. Washington may not care to notice, but the sell-off in the dollar is a daily global vote on U.S. economic policy. It is not a vote of confidence," reports WSJ.

* 'Benign currency neglect' could spell real danger for US economy: "The dollar is falling because that's what the White House wants. "It's important America continues to have a strong currency," said US Treasury Secretary Timothy Geithner last week. "We've made clear our commitment to a strong dollar," added Larry Summers, the Head of President Obama's National Economic Council. These men insult our intelligence. The US government desperately wants a weaker dollar – so boosting exports while lowering the value of America's massive foreign debt," reports London Telegraph.

* "The dollar’s 15% decline against the euro since early March are increasing concern among world leaders. At the same time, Americans are getting poorer. 'The U.S. approves of a constantly weakening dollar but doesn’t want a disruptive collapse,' said David Malpass, former chief economist at Bear Stearns and deputy assistant Treasury secretary from 1986 to 1989," reports Bloomberg.

* The Weak-Dollar Threat to Prosperity: "No countries have devalued their way into prosperity, while many — Hong Kong, China, Australia today — have used stable money to invite capital and jobs. Some weak-dollar advocates believe that American workers will eventually get cheap enough in foreign-currency terms to win manufacturing jobs back. In practice, however, capital outflows overwhelm the trade flows, causing more job losses than cheap real wages create," reports WSJ.

* The Savage Truth About the Shrinking Dollar: "Out-of-control government spending has caused a precipitous drop in the dollar and now we are see it squeezed out in higher gold prices. Our 'weak dollar policy' does not work. It may be good for Wall Street, but it's horrible for Main Street," Swiss America Chairman Craig R. Smith told national talk show host Michael Savage on Wednesday.

* "As the dollar's dominance fades with the emergence of a multipolar world, gold may stand to gain the most of all assets thanks to an unlikely quality -- neutrality. While no major currency is likely to replace the dollar anytime soon, the need for an alternative is clear, and growing," reports Reuters.

* "Growing international chorus wants the dollar replaced as the world's reserve currency, a move that would end the greenback's six decades of global dominance. The dollar has come under attack from abroad as the economic crisis has played out, thanks to the Federal Reserve's decision to flood a seized-up financial system with liquidity last fall," reports WashPost.

* Dollar fall spells BIG inflation ahead: "Your cost of living is getting ready to go up," Swiss America Chairman Craig R. Smith told Neil Cavuto of Fox News Tuesday. "It appears the world is ditching the dollar," agreed Mr. Cavuto. "With Australia raising interest rates .25% early today, they became the first G-20 nation to begin mopping up the excess liquidity created during the global credit crisis to fight future inflation," said Mr. Smith. "Unless the U.S. does likewise, we should expect a sharply weaker dollar and a lower standard of living."

* China calls time on dollar hegemony: "Beijing does not need to raise money abroad since it has $2 trillion in reserves. The sole purpose is to prepare the way for the emergence of the yuan as a full-fledged global currency. "Everybody in the world is massively overweight the US dollar," said David Bloom, currency chief at HSBC. "As they invest a little here and little there in other currencies, or gold, it slowly erodes the dollar. It is like sterling after World War One. Everybody can see it's happening," reports LonTelegraph.

* The demise of the dollar: "In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar," reports Independent.

* Gulf States Deny Secret Plan to Dump Dollar: "The world's oil producers will continue using the U.S. dollar as the currency for buying and selling crude, high-ranking oil and finance officials in the Gulf said on Tuesday, denying a report in a British newspaper," reports FoxNews.

* Farewell to dollar supremacy: "The sun is setting on the US dollar as the ultra-loose monetary policy of the Federal Reserve forces China and the vibrant economies of the emerging world to forge a new global currency order, according to a new report by HSBC," reports LonTelegraph.

* A stronger US economy requires a weaker dollar: "The US dollar will mainly have to depreciate, if a long spell of over-capacity, high unemployment and low growth is to be avoided, vis-a-vis the currencies of the roughly 50% of the economic universe that we call emerging markets and developing countries. China is the largest of these," reports FinTimes.

* Investors in Treasuries, Dollars Defy Common Sense: "Textbook economics suggests that before long, Japan and other Asian nations will start converting their dollars into euro-denominated securities -- or perhaps a new international currency backed by a basket of, say, euros and yen along with dollars. That would mean a significant decline for Treasuries and the dollar. The U.S. no longer will be supreme. Intuition alone should tell investors to look elsewhere for security," reports Bloomberg.

* Dollar's Pain Is Big Gain for Rivals: "The dollar's slump worsened in the third quarter as investors moved their cash into riskier investments in search of higher returns. The greenback may tumble further in coming weeks as investors bet that other countries will raise interest rates before the Federal Reserve," reports WSJ.

* "The dollar should be devalued because the U.S. economy is less competitive than other economies and has higher debt, and some form of SDR should become the world’s reserve currency," said Wilbur Ross, of WL Ross & Co to CNBC.  Source