Foreigners signaling more moves out of dollar

[powayseller]

The Trumpet reports about the risk of the declining US dollar.

Excerpts

“Unfortunately for Americans, however, the trust in the dollar is being broken, and it could lead to a massive financial meltdown (Spiegel Online, October 25).

In a startling announcement, former Federal Reserve Chairman Alan Greenspan warned that both private investors and central banks were beginning to dump dollars in favor of the euro.
….

Although the dollar fell by 0.5 percent against the euro immediately after Greenspan’s comments, the dollar could be in for a much longer slide, especially considering the many recent headlines suggesting escalating central bank dollar sales.

On October 16, Russia’s central bank announced that it was preparing to diversify some of its foreign reserve holdings next year. Russia’s central bank, which has the world’s third-largest foreign currency reserves, made known that although it was primarily planning to purchase Japanese yen, it may add other currencies as well. According to Chuck Butler of Everbank, when the Russian central bank says it plans to diversify “reserves,” we should translate it “dollars.” Apparently many investors agree, since the dollar immediately dropped almost 1 percent on the announcement (321gold, October 25).

On October 18, the Sydney Morning Herald ran an article titled “Costello Seeks Orderly $us Withdrawal.” The article started out saying that Australia’s “Treasurer Peter Costello has called on East Asia’s central bankers to ‘telegraph’ their intentions to diversify out of American investments and ensure an orderly adjustment.”
….

Other central banks may be positioning themselves to dump the greenback too. Besides Chinese officials, who have repeatedly warned that China will one day diversify away from the U.S dollar, Sweden’s Riksbank, the Central Bank of the United Arab Emirates, Qatar Central Bank and the Central Bank of Syria have all announced intentions this year to diversify their reserves away from the U.S. dollar and to the euro.

Spiegel editor Gabor Steingart agrees. Characterizing America’s imbalanced economy, he says “in the long term, currencies can’t be stronger than the national economies from which they derive. Consumption without production, imports without exports, growth on credit—these are all things that can’t last in this world” (Spiegel Online, op. cit.).
The odd thing about the statement made by Australia’s treasurer, when referring to possible foreign dollar sales, was this: “Of course you can have an orderly adjustment …. And what I would recommend is that these matters [dollar dumping] be telegraphed well in advance. I think we should begin preparing ourselves for it” (op. cit.). Yet Asians, including the Chinese, have been telegraphing this very intention for almost a year now. No one should be surprised if they start doing what, months ago, they warned they would.

The writing seems to be on the wall; are you prepared for a significant dollar devaluation?”

So are these countries telegraphing their intentions of holding less dollars, to ensure an orderly decline? If the dollar devalues, will the euro, swiss franc, and gold fare better? I certainly don’t have the answers, but a well diversified cash portfolio does seem prudent.

[bubba99]

The move out of the dollar has been stable and consistent. In 2002 it was 1.1 euro for one dollar. Today it is .78 euros for a dollar. Except for a brief rise at the end of 2005, it has been consistently down. It has been dollar denominated debt that has allowed the US to continue with deficit trade balances for years. In January a dollar bought about .86 Euros. Today that dollar buys about .78 Euros – a loss of 8 cents or almost 10% this year. So while the owner of the debt is being paid 5% by the U. S. Treasury, the currency exchange is costing him/her 10%. It is this negative interest that is funding the current US economy. We are buying foreign goods and services in dollars of debt and repaying them in devalued US dollars. Our trading partners are saying not any more. Even UAE is quitting us. Time to move out of the dollar.

My broker found me some Euro demonolater German and Netherlands government bonds paying about 2.5 to 3 percent. I’ll miss the current run up in the Dow, but the risk is a lot less. If the dollar vs. the euro continues its current trend – down – then the investment should yield 18% in dollars the middle of next year. The risk is that the Fed will stabilize the dollar by fixing the economy, or breaking it. That the trade deficit will go away as greater US exports pay for the imports is not likely. Other than food, I do not see much changing in the way of exports. For Americans to buy American, America would need to produce something here at home. Even an American car has 60% foreign parts. For Americans to stop buying everything foreign, they would need to be out of work. NO, these knuckleheads have really screwed up the economy to the point that it will take a recession/depression to begin to rebuild it. And with the world trade denominated in euros, there is not much chance that America will take leadership again. If and when OPEC denominates in euros our fate is sealed. I can only hope that we can still bring enough political pressure on OPEC to keep playing. Maybe that is what Iraq is about.

Man, I hope I am wrong! And I could be. If as the US economy turns down in a recession, so does the rest of the world. The US economy is the consumption engine that runs the worlds economy. China, Japan,Tai huan, Singapore, Germany and France all need the US to keep consuming to keep their domestic economies running. On top of that they need NATO or one of our other political organizations to keep safe. The US could stop the move out of dollars simply by threatening to bring the NATO or SEATO or . . . forces and “dollars” home. Another move could be tariffs on imported goods high enough to pay for the deficit. Forget the World Trade Organization (WTO) and start managing the US economy for the US. If others do not want to play, then they can go elsewhere to sell their goods and services. But unfortunately, I believe this will take a political will we do not have. Or the US could just stop creating dollars.

The M3 money supply (discontinued by the fed) will grow by a trillion dollars this year. Just say no. Stop increasing the supply of dollars, which has doubled since 1995, and stop the decline in the dollar. A dozen steps they could take to stabilize the dollar, but they will probably “stay the course”

[Anonymous]

Makes sense, bubba. Sad and scary but true.

[gold_dredger_phd]

But Dick Cheney said deficits don’t matter and Reagan proved it.

Deficits *do* matter, but maybe not for a few decades or they matter when the politicians are no longer in office.

Why should we be astonished when people take their home equity out and spend it thinking that they never have to pay it back. Homeowners can’t print money like the government can.

Parents can live very well if they have some means of making their children pay for it or maybe their neighbors’ children.

[powayseller]

bubba, you’re making so much sense, it is scary. I wonder if the dollar decline will be orderly or sudden. Could the dollar plunge in one day, just like the stock market?

Where did you buy your German government bond? I have been wanting to buy one for a long time, but cannot find anyone who sells them.

Has anyone considered investing in the Merk Hard Currency Fund , MERKX?

“The Merk Hard Currency Fund is a portfolio that invests in a basket of hard currencies from countries with strong monetary policies assembled to seek protection against a decline in the dollar while mitigating stock market, credit and interest risks. The Fund normally invests mainly in high-quality, short-term money market instruments of countries pursuing sound monetary policy, as well as in gold.”

Euro 46.2%
Swiss Franc 6.2%
British Pound 3.4%
Swedish Krona 4.5%
Norwegian Krone 3.2%
Australian Dollar 12.1%
New Zealand Dollar 2.0%
Canadian Dollar 13.4%
US Dollar, net * 0.1%
Gold * 9.0%

[Raybyrnes]

If you are so convinced of the downturn why would you not just go short or start buying puts as a hedge against this supposed downturn.

I ahve been accumulating the likes of SPI and PCU. Both high diveidend paying stocks. Very comparable to rental analoiges. As soon as the stock begin to trade sownward people eye the yield and prop it back up. Very nice equilibrium to this type of investing.

[powayseller]

Raybyrnes, I bought inverse index funds a couple weeks ago. I only put 10% of our money in it. The rest is in cash. When our 3-month TBill expires, I plan to put some of that into alternative currencies (Merk fund, gold) and inverse index funds.

Zeal’s articles on the dollar bear are worrisome. US Dollar Bear 4: “From its peak in mid-2001 to its trough in late 2004, the US Dollar Index lost a staggering 33.3% of its value in the world currency markets! ” Zeal writes the US dollar is in a secular bear market, and the 7% rise off the low in December 2004 is just a short lived rally within a much longer secular bull. They say the dollar has a long way to fall.

One problem is that the Federal Reserve increases the dollars in circulation by 8% – 9% annually. This increased supply lowers the value of each dollar.

Add to that rising dissatisfaction among the international community with having so much of their money in the US dollar, and the start of diversification. Demand is falling, very slowly, but falling. Will this lowered demand turn around?

We have rising supply of dollars, falling demand… Not a good picture.

[qcomer]

I have some of my cash in MERKX and what I like about it is that it doesn’t try to speculate in currency markets or chases higher yields etc. They go for the currencies of countries that have sound monetary policies. However, its expense ratio of 1.30% is just too high and for a big cash portoflio, you end up paying too much in fees. I would like something under 1%. Pimco also has currency or international bond funds.

[rocketman]

I am thinking of buying MERKX myself.

I just came across this fund and feel it’s a safe place to put any loose change into. It is a little hefty – $49.00 one time hit on entry via E-Trade. But after reading Zeals article I too am astonished about the dollar losing 33%. It’s to scary. I’m going for it. Especially since the dollar is trading under 85 today.

[rocketman]

By the way powayseller… you are getting a reputation out there, especially with Nouriel Roubini… Keep up the good work! I enjoy your comments.

[rocketman]

News Flash… China makes Ramen out of Dollar…

There are two dates I’ll always keep in mind: July 4th, 2006 which I believe was the piercing of the Housing Bubble, and today November 9th, 2006 – the day the China admits bailing out of the US Dollar:

NEW YORK (MarketWatch) — The dollar fell to a two-month low versus the euro and traded flat against the yen, sliding to session lows after China’s top central banker said the country is looking to diversify its foreign-exchange reserves.

The dollar turned sharply lower after Zhou Xiaochuan, governor of the People’s Bank of China, said at a conference in Frankfurt that China has very clear plans to diversify its reserves, which have exceeded $1 trillion early this week, and is considering lots of instruments, said Brian Dolan, director of research at Forex.com, a division of Gain Capital.

“The dollar [is] selling off across the board on the China comments,” he said. “Zhou’s comments driving the EUR higher and this has the potential to hurt the dollar significantly across the board.”

I admire Zeals prediction.

[bubba99]

powayseller,

I got the Euro bonds from my regular broker at Morgan Stanley. Any of the big brokerages can provide. To buy direct, last time I did it I went to Lugano Switzerland and opened an account at Credit Suisse, and bought them through the swiss acct.

My acountant tells me that if the acct is in europe, and the dollars are not repatriated, then the taxes are not owed until the money comes home. I have heard other opinions. But look at it this way, pay for a great week in Europe with a new euro bond as an investment in your swiss acct.

[(former)FormerSanDiegan]

Will the value of the dollar bottom at some point and return to the mean ?

[ybbor]

There is a fare chance that it will continue to fall…

Returning to the mean is relative… dollars are, like anything else affected by supply and demand. If the supply of dollars were consistent, then yes, we would return to the mean. However, that is far from the truth… the fed prints billions of new dollars, continuously adding to supply.

The amount of new dollars used to be a known number. The fed used to (until march of 2006) publish something called the M3. This number told investors the total number of dollars in circulation. For the past few years, this number has been growing at almost an exponential rate.

The reason the fed gave for discontinuing the M3 is totally bogus. They said that it cost to much money to compile this stats (funny statement coming for the people that print money out of thin air).

-Robby
http://rvlife.mrwhipper.com/
http://economist.mrwhipper.com/

[powayseller]

From that same article: “Recent data from the Bank for International Settlements suggest the pace of diversification away from the dollar has been gradual, partly because dollar deposits by Organization of the Petroleum Exporting Countries have offset decreases from other countries, he said.”

So the diversification has started. Also, I expect to see less Tbill buying from UK. Lower gas prices means fewer dollars going to OPEC –> fewer dollars for them to invest in Treasuries (OPEC money flows through UK in Fed Flow of Funds report, so we should see a decrease in UK buying of Treasuries since last month) –> less demand for Treasuries and $ US -> higher interest rates and lower value of US $. So higher oil prices would make the US $ climb, and that is exactly what happened in the last 2 years. Does anyone have any insight on this?

FSD, the dollar’s value is tied to its fundamentals, namely supply and demand. If the Fed stops printing money and pays off some of the deficit, and we reduce our consumption and produce more and import less, then the dollar will gain value. At least that is my simplistic understanding. So we cannot return to any mean as long as we keep violating the fundamentals underpinning a strong dollar.

So I need to open a full service brokerage account to buy euro bonds? That is what I will do. Thanks for the info.

I can’t believe I was stupid enough to lose 33% of my money in the last few years, because I believed in the “full faith and credit” of the US government. I sure was fooled into thinking the dollar was a strong reserve currency. I’m seeing the light, and it’s not too late to act.

[Author]

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