As the dollar falls, so does the wealth of dollar holders – particularly Americans. We checked this morning and found the dollar had dropped to over US$1.38 per euro. Last week, we paid US$5 for a cup of coffee in London. And the price keeps going up.
Why is the dollar falling?
Speculators, investors, and central bankers have figured out that the US government and the Bernanke Fed will not protect the dollar – not when millions of Americans are having trouble making their mortgage payments. The US money supply is increasing – nearly five times faster than GDP growth. And now, fearing a Japan-style deflation, the Fed is likely to cut rates later this month.
The Chinese have one of the largest dollar piles in the world.
“Is China quietly dumping US Treasuries?” asks Ambrose Evans-Pritchard in the English press.
“A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.”
The report continues:
“Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone.
“‘This comes as a big surprise and it is definitely worrying,’ said Hans Redeker, currency chief at BNP Paribas. ‘We won’t know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don’t seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros,’ he said.
“Two top advisers to the Chinese government gave strong hints in August that Beijing should use its estimated $900bn holdings of US Treasuries and agency bonds as a ‘bargaining chip’, words taken as an implicit threat to trigger as US bond crash if provoked.”
The Chinese have denied it, of course. But betting against the U.S. dollar has been one of the surest gambles you could make over the last 35 years. Now, it is probably still a good bet.
Markets and Money