Sat Apr 22nd, 2006 at 04:31:48 AM EST
I had a long series of Dollar Dump diaries on DailyKos in late 2004 following a weakening dollar. I was humiliated in 2005 by the FX markets ignoring my brilliant rationale and Warren Buffett's dire warnings. Instead they preferred dollars to less frothy currencies, buying into the Bubbles Greenspan (Jerome's moniker) myth of a new paradigm where trade and fiscal deficits don't matter and housing bubbles are not really dangerous.
Now that Greenspan is gone, the housing bubble is rapidly deflating, and the Fed is nearing the end of its interest rate raising cycle, the markets are once again fearing for the fate of the greenback. Central banks hold dollars as reserves, so stand to lose two ways if the dollar declines - in asset value and support for their own currency's strength.
Today we learned that the Riksbank, the central bank of Sweden, has cut its dollar reserves from 37 percent to a mere 20 percent, favoring the euro instead. Reuters is already fanning the embers of concern into the flames of panic by asserting that this may indicate a broader trend - especially if China gets stroppy.
From the diaries ~ whataboutbob
LONDON, April 21 (Reuters) - The euro reversed earlier losses on Friday after the Swedish central bank said it had increased the euro's share in its foreign exchange reserves to 50 percent.
The move follows dollar-negative comments in recent weeks by Gulf central banks that they are considering increasing the share of the euro in their reserves.
"There's a feeling that central banks hunt in packs so even though Riksbank reserves are relatively small markets will speculate about others doing the same," said Tim Fox, foreign exchange strategist at Dresdner Kleinwort Wasserstein.
The United Arab Emirates central bank board met at the beginning of the month to discuss shifting away from the dollar for its reserves as well.
The board of United Arab Emirates' central bank met over the weekend to consider shifting 10 percent of the bank's reserves, which stood at $23 billion in December, from dollars to euros. They have not yet announced any decision.
"If that turns in to a trend throughout the region that will then have a significant impact and could well lead the way for a more global move towards the euro more as a reserve currency," said Stannard at BNP.
As usual, the Bushistas blame nasty foreigners for their problems, saying that the Chinese must revalue their currency, the renimbi, rather than the US doing anything about the dollar, the record federal deficits, or the record $726 billion trade deficit. Given that the Chinese proportion of the American trade deficit is only 27 percent, Chinese revaluation alone will not solve the US dollar problem.
It may be that the lack of political will, fiscal discipline and monetary leadership from Washington will be corrected by the judgement of the central bankers and the markets. The judgement of markets is usually harsh and painful for economies who have strayed so far from prudence and restraint.
The only comparable case is the decline of Britain from proud issuer of Sterling ("safe as the Bank of England!") to indigent beggar of IMF hand-outs in a mere 30 years.
If you want me to restart the Dollar Dump series now given current conditions - or want me to shut up - let me know in the poll.