Is There a Risk of a Run on the Dollar in 2009?

With no US economic data on the calendar Tuesday, the dollar weakened against every major currency except for the British pound. Trading continues to be very thin with commodities being the only products that are really moving. The tensions in the Middle East have driven oil and gold prices higher. US stocks also gave back Friday’s gains and remained contained within its weeklong trading range.

Housing, Manufacturing and Consumer Confidence

Hopefully trading will get a little bit more interesting on Tuesday, when we have the CaseShiller house price index, Chicago PMI report and consumer confidence number due for release. Weaker economic data is not a given. Although house prices are expected to continue to fall as homeowners and builders offer discounts to drive sales, we could see an improvement in the Chicago PMI report and consumer confidence. Manufacturing conditions in the Philadelphia region rebounded this month, which suggests the potential for a similar improvement in Chicago. Lower gasoline prices have also helped consumer confidence recover according to the University of Michigan’s report last week - the Conference Board’s report should reflect a similar shift in sentiment.

2009 Risk: Run on the Dollar

One of the biggest risks facing the US dollar in 2009 is a run on the currency. The global slowdown has forced many central banks around the world to become internally focused. This means that any money that they have will be spent on spurring growth domestically instead of funding US spending. With next to zero yield, a deteriorating balance sheet and the risk of a weaker dollar eroding the notional value of any US investments, there are almost no reasons for foreign investors to load up on US debt. Having been burned badly by investments in Fannie and Freddie Mac, sovereign wealth funds like China have become skeptical of buying more US paper. According to an editorial in the state owned newspaper, China Daily, “China’s increased purchase of U.S. Treasury securities should not be interpreted as an endorsement of the assumption that the U.S. can borrow its way out of the current financial crisis.” If dollar demand continues to wane, we have yet another reason to expect the dollar to weaken in the first half of next year.

Comments

[DiggerUK:]

Your analysis still doesn't chart what would be the effects of other central banks going to ZIRP.
Merely stating that the dollar could wane in 2009 is akin to "no comment"

2008 Dec 30 10:47 AM

[punk_ash:]

I guess I will have to stop reading the content and read seeking alpha for the headlines that they have. I mean nothing is impossible, I mean just look at the quality of your article and who would have thought seeking alpha would let you post garbage. Nothing is impossible you see...

2008 Dec 30 12:02 PM

[MarvinMBA:]

Watch the dollar recover early next year is my considered opinion...the next interest rate change is going to be positive,,,MarvinMBA

2008 Dec 30 12:38 PM

[John Polomny:]

The US is a debt based consumer economy and consumers are over indebted. In addition we have unfunded future liabilities of an estimated $70 trillion. The US is broke so will there be a dollar crisis in 2009? Hard to say but a policy of inflation to remedy the above will lead to continued dollar weakness and an eventual repudiation of the dollar.

2008 Dec 30 01:49 PM

[Asbytec:]

Non existent inflation will debase the dollar. However, the apparent deflationary spiral we're in and deleveraging will serve to shore it up. As long as the credit markets remain stagnant, inflation is not a concern.

Yes, next interest rate change is likely to be positive, but when will it come? Probably not until the end of 2009 at the earliest. The fed will fight inflation once it appears...in the data, The Fed may also employ other monetary tightening tools, too. I suspect they will fight inflation as aggressively as they tried to stoke it.

2008 Dec 30 07:52 PM

[nmelendez:]

The big issue will be, in what currency will oil/commodities be exchanged. Iran is now accepting gold and euros for oil. Once this starts, you may see Iraq, Russia and China starting their own currency trade. Even if the dollar stays the world currency, what's the use of a title no one adhers to. Like a King with no kingdom.

2008 Dec 30 08:16 PM

[Moon Kil Woong:]

It is very easy to say at 0% the next interest rate change will be up... LOL it doesn't take a brain scientist to derive that tidbit of information. Anyway, last I checked every foreign country was running to the Fed asking for US dollar reserves to stabilize their economy. It is hard to buy stuff like oil etc. in foreign countries without dollars. Sure some take Euros and Yen, but last I checked you can't find overseas transactions denominated in the currencies of any other country in the world.

I'd bet a run on any other currency in this crisis over the US dollar starting with Russia and India's currency.

If there is a commodity squeeze as dollar bears decry, the US dollar tends to rise because almost every commodity is traded in US$. Welcome to the International market where the US still sits pretty on the top of the exchangeable currencies. So how exactly does the dollor go down. The only one that can kill the dollar is the US.

When the US government debt load get unsustainable then it can fall. That may be decades because I've been hearing that arguments for decades already and it hasn't happened. The problem needs to be solved but the fuse before detonation is obviously a very long one.

2008 Dec 31 02:10 AM

[NOWHEREMAN:]

Constructe: excellent post. Dollars are still being sucked into the Black Hole called the US Financial system. The velocity of these newly created funds poses no inflationary risks until until there is some actual circulation.

The recent rally in gold and drop in the Dollar portends what might actually occur given time. But not yet.

IMO

2008 Dec 31 09:56 AM

[Asbytec:]

Hey, I'm a brain surgeon...not a brain scientist. I don't even know what one of those is.

How is it that commodity prices affect the dollar? Isn't it the other way around? Deflation, baby!

And it isn't just government debt that will fall, it's total debt...consumer and corporate, included, that will cause a fall. Yes? No? Maybe?

Oh, this is gonna earn me some thumbs down...

Happy New Year, all! Even you, Construe...and Aitvaras...whatever that means. :)

2008 Dec 31 11:07 AM

[petetoth:]

Yes, based on your argument the dollar should fall, but in reality there are bigger forces than fundamentals at play here. I doubt anyone can predict what will be happening with FX in the next year.

2008 Dec 31 11:57 AM

[Kunst:]

Kathy Lien writes great headlines but lousy articles.

Jan 01 01:59 AM

[Ricard:]

The author wrote:

"Having been burned badly by investments in Fannie and Freddie Mac, sovereign wealth funds like China have become skeptical of buying more US paper."

My understanding was that China was invested in Fannie and Freddie products, not equity. The US bailout of the two essentially saved China's investment, and forced Paulson to issue an apology to the Chinese about the embarrassing US financial situation at the time. The above quote is completely incorrect. The Chinese may be more cautious, but so is everyone else.

www.npr.org/templates/...



If I remember correctly, Bill Gross also made a mint trading into the same products right before the bailout. I'm glad Kathy does not trade for my account.

Jan 02 12:36 AM