Sunday, December 9, 2007

Euro’ll do nicely! – Get ready for the switch!

The falling dollar: Losing faith in the Greenback

The fear that the dollar could be swiftly supplanted as top dog is based on the idea that one currency will always have a near-monopoly: if everyone holds dollars chiefly because everyone else does, you could imagine how a falling share of global reserves might reach a point when central banks all suddenly switch to a new currency standard.

Posted by stevie dee @ 08:17 PM (701 views)
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4 thoughts on “Euro’ll do nicely! – Get ready for the switch!

  • A delightfully hedged article! Maybe it will, maybe it wont. Maybe soon, maybe not. It would have been nice if he’d at least attempted a conclusion…

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  • True, but th fact it has been mentioned, is to leave the rest to make own mind up or conclusion.

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  • The US will suffer inflation no matter what happens. The dollar’s share of world currency reserves is bound to fall, with the slack taken up mainly by the Euro. Many of the dollars currently floating around overseas will eventually wind their way back to the USA as foreigners become less keen to hold them. This means guaranteed inflation in the USA and devaluation of the dollar.
    Here’s how I see it panning out:
    1) Dollar loses more value as foreigners trade dollars for euros
    2) Inflation hits the USA, 1970s-style; possibly double-digit
    3) The inflation softens the housing market problems by inflating away the debt
    4) During this inflationary period the dollar will be low
    5) Once inflation has shrunk the debt, interest rates will rise again to quash the inflation and restore strength to the dollar (early 1980s)

    So basically, wait until the americans start taking inflation-control seriously before buying dollars or american assets (shares or property). That’s a few years away yet. The low dollar will trigger a boom in exports (as we’re already seeing with Boeing) and an economic recovery – that will be the time to start buying american assets again.

    The fate of the pound in all this is less clear. Any thoughts?

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  • drewster… I think you might have put the cart before the horse. There are a lot of dollars and T-bills in asian reserves. They are going to want to get a reasonable return on their investments, and not allow the US to inflate their own debt away so easily. So they’ll be buying boeings and cool software and biotech, about the only things the US is any good at, and this will push the dollar up off its lows in the near term, give the asians some toys and tech to play with and copy, and allow them to divest themselves of all the dollars more slowly and at better value. This might also soften the medium term US recession, but I doubt it will change the fundamentals enough to re-ignite new growth or reverse the recession. Once that process is well underway and the chinese have got what they want, then the scenario you’ve described will finally take hold in the US, around 2009/2010, dipping into a new depression with stagflation, the dollar disappearing toward nothing and relegated as a reserve currency around 2015.

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