Fears of Dollar Collapse?

by: Barry Ritholtz

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

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