We thought that it would be a good time to review what is happening
to the US dollar. To us the biggest problem for the dollar is the amount
of the US trade deficit. For 2006 we will see this deficit top out at
about $700 billion.
The real problem with a deficit this size is
that that the dollars are no longer in the US and held buy Americans.
What it means is that the US has bought $700 billion more of goods than
it has sold, resulting in those dollars being held overseas. Once these
dollars have changed hands, the
holders of them are free to do with them what they please. If they decide to re-invest them into the US, either through the stock market (which has been happening until recently) or in keeping the money in US accounts to gain interest, then there is no negative effect because the dollars stay in the US.
holders of them are free to do with them what they please. If they decide to re-invest them into the US, either through the stock market (which has been happening until recently) or in keeping the money in US accounts to gain interest, then there is no negative effect because the dollars stay in the US.
The problem starts when these holders of
US dollars decide that they do not want to keep US dollars and prefer to
buy or invest into something else, such as exchanging the dollars for
euros or some other currency, or gold. As more and more holders of the
US dollar decide to reduce their US dollar holdings and invest them into
other currencies, the result is a reduction of liquidity in the US.
While
there is a great deal of US dollars being held by foreign investors,
the biggest holders are foreign central banks. It is these central banks
that we believe will start to reduce their holdings of the US dollar to
diversify away from one main foreign reserve holding. And we believe
that this
move away from the US dollar has already begun. Many of these banks have been sending out the word that this is exactly their intention. It is a real juggling act because no country wants to the dollar collapse, especially since most of the central banks still hold a huge percentage of their
foreign reserve in the US dollar.
move away from the US dollar has already begun. Many of these banks have been sending out the word that this is exactly their intention. It is a real juggling act because no country wants to the dollar collapse, especially since most of the central banks still hold a huge percentage of their
foreign reserve in the US dollar.
They all want to reduce
their exposure to the dollar, but do not want any other central bank to
panic and have a run on the dollar. But they are certainly giving us
plenty of hints to suggest that many of these central banks want to
reduce their holdings of the US dollar and diversify into other
currencies and gold. Some examples:
currencies and gold. Some examples:
o Nov 9/06 - China
announces plans to diversify out of the dollar. From Bloomberg: Gold in
New York gained the most since June on speculation China will boost
purchases of the precious metal to diversify its foreign-exchange
reserves. "All central banks are trying to diversify," People's
Bank of China Governor Zhou Xiaochuan said at a conference in Frankfurt. "We have had a very clear diversification plan for several years."
Bank of China Governor Zhou Xiaochuan said at a conference in Frankfurt. "We have had a very clear diversification plan for several years."
o November 17/06 - United Arab Emirates Governor
speculates Euro will over take US dollar. From Bloomberg: "United Arab
Emirates Central Bank Governor Sultan Bin Nasser al-Suwaidi comments on
the outlook for the euro overtaking the U.S. dollar as the dominant
reserve currency for international trade... 'I would say the euro will
definitely grow to dominate trade outside the euro area. I expect the
euro to become the currency of international trade within 10 years. It
will surpass the dollar by 2015.
