Fears of Dollar Collapse?

Saudi Arabia, which usually mimics every FOMC move, has refused to cut interest rates in lockstep with the US Federal Reserve for the first time. According to an article in the UK Telegraph by Ambrose Evans-Pritchard (Fears of dollar collapse as Saudis take fright, September 2007), Saudi Arabia is signaling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg.

This could potentially cause a cascading chain reaction across the Middle East -- setting off a stampede out of the dollar and towards either a basket of currency, or more likely the Euro.

Last month, Mr Evans-Pritchard was expressing concern that the "Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation."

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels. It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds. (August 2007)

Before you dismiss Mr Evans-Pritchard as a Dollar Bear, recognize what he has said in the past about the Greenback:

"Disregard all hysteria. The ailing Greenback will not collapse this year, not in ten years, not in twenty years, not in half a century. There is no credible currency against which it can collapse. (Unless you count gold). None of the world's rival power blocs have the economic and demographic depth to challenge American dominance." (July 2007)

That this is the same author suggests that something significant has changed recently . . .

Sources:

Fears of dollar collapse as Saudis take fright
Ambrose Evans-Pritchard
UK Telegraph, 8:39am BST 20/09/2007
http://tinyurl.com/yp7q5u

China threatens 'nuclear option' of dollar sales
Ambrose Evans-Pritchard
UK Telegraph, 8:39pm BST 10/08/2007
http://tinyurl.com/ysxlok

Dollar to collapse?
Ambrose Evans-Pritchard
UK Telegraph, 12 Jul 2007 at 16:48
http://tinyurl.com/2vjbj8

Comments

[ErnieMontague]

The dollar has already collapsed. It will collapse further. With the Canadian dollar now virutally at parity and the Euro at $1.40, the dollar has not slid, it has fallen on its face. And now the bullies will come over and start kicking.

[Lee Carlson]

The way the present administration is spending, many billions per year on the never ending war, the import of everything we buy, the price of food going up, high gas prices, all depleting the supply of dollars, and the Fed. keeps pumping out fresh dollars, is it any wonder that the Mid-east countries are worried that the Euro is about $1.38 and the Canadian $ is almost even with the American buck. so do the Saudi's have reason to worry ? I would guess so !!
Unfortunately, no one in Washington is worried about anything except getting reelected !
If you were the ruler of a Mid-east country, wouldn't you think about pegging the price of oil to the Euro ? And the Chinese are holding so much American dollars, if they are not worried, it is only because of stupidity !
No one has wrecked an economy more than the present administration in my lifetime ! (That's quite a while ! )
The only reason to hang around these web sites is that I can't wait to see what the next bunch of Yo yo's in D.C. do ! LC

[Brian Croner]

Globalization equalizes stuff a lot. Not just work value. We don't just see corrections to currency. There's also quality of life equalizations that occur. Things will get pretty much normal all over the world. In America, just because people are Christian doesn't mean they're especially stupid. They don't necessarily practice what they preach, and they compensate for their state of denial of science with extra hours of work. In software, that's not even so bad. Half-assed work gets the job done. Plus, a lot of problems you solve in software come from acquired knowledge, not just the ability to code your way out of a paper bag. You don't learn things by living a fulfilling life, like they do out there in other countries. Americans sit on their ass at work and just end up learning stuff. So practically, I'll correct my judgment. There is less danger to the buck than I would have thought in the recent past. I agree with this article. The US Dollar collapse probably is more a Bush thing than a Hilly thing or an Obama thing. Conservatives drain value from the dollar for their friends. Liberals contribute value to the dollar. Generally speaking.

[Brian Croner]

I have reconsidered the condition of the nation's currency. The USD is in trouble at the holistic level. The non-working does not just consist of rich. It also consists of the baby-boomers who are about to retire. The system has tremendous demands on it in the near future. If social security won't pay bills, the baby boomers will have retirement problems. They can't all work to the day they die. They don't have much in retirement. Their savings and holdings are all in the 401(k) plans and holdings that are subject to volatility in the markets. A crash this time with a rapidly aging population puts retirements into jeopardy. That's mom and dad for a lot of people. Even with the rotten childhood I had, I'd still pay my own money and do what it takes to keep them living when they're too old to work, as they did the same for me when I needed it. Who in the hell is going to let their own mom die if I wouldn't? A crash destabilizes retirement and burdens Gen X & Y with the care of their parents, as well as the rich non-working, and they probably have kids they can't raise properly. Plus the baby boomers aren't unhealthy. They'll live old. The adjustments needed will be enforced by global business trends, but there's a threat to the way of life of the rich because skilled labor is rapidly becoming scarce in our global economy, especially in corrupt America, where ability will pay you near nothing and connections will pay you near everything. Marilyn Monroe said in Hollywood you get $1 million for your body and a penny for your soul. I think she was already considering suicide when she said that because she was aware of her conscience problems in knowing as much as she did about aristocratic money.

In politics, a democrat is a republican that calls himself/herself a democrat instead of a republican.

[Steverino]

The Chinese are sly devils! They have decided that conquering the US by military action is just too expensive. So instead, they will keep investing in our debt (way beyond current levels) and then pull the plug (via Nuclear option or otherwise). Then when our economy is in the dumper, they can just walk in and foreclose/repossess and take pretty much the whole country.

[Skjellifetti]

If the Chinese are going to pull the plug, don't they have to sell the bonds they hold? Just who are they going to sell them to?

[Georealist]

All currencies are very much in the same boat...they devalue at different rates and at different times. There's not a single one that stands to take the place of the US $ as the worlds reserve..the Japanese don't want the yen to appreciate much, if at all. The Chinese are in a very delicate bvalancing act with interior China and Coastal China at severe odds over economic issues. The Euro has the bond and equity markets to stand as one of several reserve currencies, but certainly not alone.
The $ has not collapsed..it is being whitled away. The only other credible reserve that would be universally recognized would be gold..and the countries that could cause the most reserve angst..China, Saudi Arabia, Russia, Japan...all have populations that value precious metals greatly. Wait for the first large commodity exchange to occur valued in gold bullion..the worm will have turned.