I had a couple of comments left on my post this morning.
One reader asked why I thought interest rates would go up in the scenario laid out in the post. If there is less demand for dollars the market will demand greater compensation (in the form of higher rates) for holding a currency that turns out to be less important than it once was. Hopefully no one took my comment about deficits to mean I think they are unimportant, they are important and potentially market moving in a substantial way including interest rates.
The bigger idea is if the dollar shares its role as reserve currency it will be competing for capital in a way that it does not do today. The competition puts upward pressure on rates. If there is not enough compensation to hold dollars foreign investors will not hold dollars but our debt situation is such that we need them to hold dollars. That last sentence is much gloomier than I view this but that is the bottom line to it.
The other comment brought up whether oil might be priced in something other than dollars but the reader does not make the connection that this would be bad for the dollar (if I read the question correctly).
Oil, gold, copper and just about everything else trades in US dollars. This creates a constant demand for dollars creating a certain level of importance. Any trading that occurs for these products in another currency is less demand for dollars. Less demand is behind the entire theme of the post.
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4 comments:
I have to disagree with you foriegners will not control our interest rates the fed will control interest rates. If there are too many dollars out there interest rates will not rise, the value of the dollar will just fall faster.
This is happening as we speak. The dollar will keep falling, but not as far or as dramatic as you would think.
No other country wants there currency to become the worlds reserve currency. Reserve currencies become to valuable and exports plunge, so this will take a while.
I see a slow grinding devaluation of the dollar over time. This should increase when the fed eventually starts lowering interest rates.
i am not saying the US will cede being world reserve currency i think they may have to share.
sorry if my post implied otherwise
Currencies seek their own level no matter what the monetary intervention...and that is part of confusion is knowing the ups and downs of valuation. As mentioned, sooo many dollars are out there. The die is cast but who knows when or how low, or how volatile. Roger, I like your big picture perspective as part of your process. And, lets assume that you are right..i.e,the dollar goes lower (for whatever reason) and our fed will intervene...what do you think are the practical implications for taking action?
It is not clear to me if the fed would step in so much as the rest of the curve might selloff to some equilibrium point.
Assuming this is a slow shift (which is what I would expect if this turns out to be correct) and not a three month panic I would think foreign stocks/bond and cash would all do better than domestic stocks and bonds.
Chances are commodities as an asset class would do well too. Also I do not think and orderly shift would impact the China/India story so thing that benefit from that now could still benefit then as well.
Let me stress that I do view this as apocalyptic. It is in no one's interest for some US meltdown.
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