Anyone Else At The Panic Point On The Dollar?

[The once and future king]

I guess my last post was slightly OT, but I think it helped us to see the interrelation of crises that are effecting the global financial system at the moment.

Anyway, a bit of browsing from that link above lead me to this excellent article which talks about the dollar specifically.

bet your bottom dollar.

Teaser paragraphs:

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The dollar isn't any old currency. And it isn't just the currency of the biggest economy on earth. The dollar is the world's "reserve currency" - which means central banks everywhere use it to stockpile wealth. No less than two-thirds of all sovereign foreign exchange holdings are denominated in dollars.

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Last week, the dollar dropped to yet another record low - reaching the verge of $1.50 to the euro. On a trade-weighted basis, the currency has, in four years, lost a third of its value. But the dollar's long dive means countries worldwide, having used the currency to store their reserves, are sitting on massive losses.

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US officialdom feigned concern but, in reality, America laughed up its sleeve. A falling dollar shoved the burden of US adjustment on to the rest of the world.

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In recent months, though, the dollar has headed south with a vengeance - after Wall Street recklessly securitised $900bn of sub-prime loans. And, of course, as US property prices fall and default rates keep rising, this sub-prime crisis gets worse.


Last week, Federal Reserve Chairman Ben Bernanke said $150bn of loans will end up being written off. The Bank of England, in private, says $200bn. The reality, as this column has long maintained, will be at least $300bn.

Whatever the eventual figure, given that "only" $40bn has so far been written off, there is a whole world of pain to come. And, remember, these ghastly securities are largely dollar-denominated - so when foreign investors try to dump them that pushes the currency down even more.

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Over the past seven years, the single currency has risen by a shocking 82 per cent against the greenback. That's hammered eurozone exports - provoking serious trade disputes between the EU and US, the world's two biggest trading blocks. No wonder French President Nicolas Sarkozy describes America's drooping dollar as "a precursor to economic war".

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But America's currency-related tensions with Europe are as nothing compared to the brewing crisis with China, Russia and the oil-rich Gulf states. As is well known, these countries - and emerging markets in general - used to run big trade deficits. Strong exports and expensive oil means they now boast big surpluses. As a result, their foreign exchange reserves have ballooned, with China controlling $1,400bn, Russia $450bn and the Arab world much more than it admits - the vast majority in dollars.

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