Dollar Crisis: THE Story of 2009-2010
Obama’s hope flickers as the U.S. dollar burns
BY DAVID BRADSHAW ~ Editor, Real Money Perspectives
Oct 16, 2009

The dollar is making new economic headlines daily as the world rushes to find a new reserve currency with a trustworthy store of value. Here are two dozen headlines just from the past two weeks! Together they explain what's behind the world's plan to ditch the dollar ASAP.

* Next big political issue? The U.S. dollar: "The state of the dollar probably hasn’t been a first-tier political issue in the United States since, say, the presidential election of 1896. Back then, it manifested as whether or not America would stay on the gold standard or switch to a bimetallic one. A recent Rasmussen poll found that 88% of Americans say the dollar should remain the dominant global currency. They sure think a weaker dollar is a sign of a weaker America. It is just a matter of time before global financial markets reject America's dismal deficit outlook, and that could lead to a punishing dollar crisis," reports Reuters.

* Dollar To Drop 20%: "The dollar will extend its drop versus the euro over the next two to five years, falling as much as 20% to an all-time low under a widening U.S. budget deficit. Policy makers favor the dollar’s slide as a means of supporting a recovery," Harvard’s Professor Niall Ferguson, author of "The Ascent of Money: A Financial History of the World" said to Bloomberg.

* Dollar to Hit 50 Yen, Cease as Reserve: "The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency," Sumitomo Mitsui Banking Corp.’s chief strategist Daisuke Uno said. "We can no longer stop the big wave of dollar weakness. The greenback is heading for the trough of a super-cycle that started in August 1971. After the dollar loses its reserve currency status, the U.S., Europe and Asia will form separate economic blocs. The International Monetary Fund’s special drawing rights may be used as a temporary measure," reports Bloomberg.

* Dollar Decline Must End: "Over the past six months, the dollar has lost 15% while gold has climbed nearly $150. If this continues, spiking inflation and interest rates will choke off the bull market in stocks and do serious damage to the economy. It could happen fast. How to solve this problem? In supply-side terms, cut tax rates for new growth incentives," reports Kudlow at CNBC.

* The Message of Dollar Disdain: "If money is a moral contract between government and its citizens, we are being violated. The rest of the world, meanwhile, simply wants to avoid being duped. That is why China and Russia—large holders of dollars—are angling to invent some new kind of global currency for denominating reserve assets. As the dollar is increasingly perceived as the default mechanism for out-of-control government spending, its role as a reliable standard of value is destined to fade," reports WSJ.

* US policymakers playing with fire as the dollar continues to tumble: "The willingness of foreigners to hold dollar assets has allowed American citizens to consume beyond their means for many years. If the collapse in the MBS market exposed the first chink in American economic armor, a rejection of the dollar as the world's reserve currency could expose an even bigger hole. If other nations begin to believe the US is happy to allow its currency to plummet, they may all head to the exit at the same time. The US is not just playing with monetary fire: it may also be encouraging an epochal shift in the world financial order," reports the Independent.

* Dollar facing 'power-shift': "The US dollar is being hurt by the continued talk of a shift away from a dollar-centric world. As long as the US economy is not strong enough for any rise in interest rates to be conceivable for a long time, the dollar's underlying downtrend will remain in place," reports AFP.

* Russia ready to abandon dollar in oil, gas trade with China: "Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday. 'We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans,' Putin said. Britain's Independent newspaper reported last week that Russian officials had held 'secret meetings' with Arab states, China and France on ending the use of the U.S. dollar in international oil trade," reports Russia's RIA Novosti.

* Obama's peace shattered as dollar takes a pounding: "The divergence between Obama's Nobel honor and the marketplace repricing of his country's future would appear to be a stark lesson in the difference between hope and reality. Hope for Obama's plans may soar, but his ability to meet those hopes is shriveling with the value of the currency," reports Sidney Morning News.

* Dollar Reaches Breaking Point: "The anti-dollar trend is unmistakable. The world is changing, and the dollar is losing its status. World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy. Central bank diversification signals that the currency won’t rebound anytime soon after losing 10.3% the past six months," reports Bloomberg.

* Dollar Adrift: "The Fed will let the dollar fall. For a time in the wake of the panic, the dollar benefited from a flight to the relative safety of U.S. Treasurys and other dollar assets. But as this overall global risk aversion has ebbed, the risk calculus has turned and the dollar itself has become more dangerous to hold than non-dollar investments. If the fall of the dollar becomes a rout, this could cause a spike in commodity prices and jeopardize the nascent economic recovery. Washington may not care to notice, but the sell-off in the dollar is a daily global vote on U.S. economic policy. It is not a vote of confidence," reports WSJ.

* 'Benign currency neglect' could spell real danger for US economy: "The dollar is falling because that's what the White House wants. "It's important America continues to have a strong currency," said US Treasury Secretary Timothy Geithner last week. "We've made clear our commitment to a strong dollar," added Larry Summers, the Head of President Obama's National Economic Council. These men insult our intelligence. The US government desperately wants a weaker dollar – so boosting exports while lowering the value of America's massive foreign debt," reports London Telegraph.

* "The dollar’s 15% decline against the euro since early March are increasing concern among world leaders. At the same time, Americans are getting poorer. 'The U.S. approves of a constantly weakening dollar but doesn’t want a disruptive collapse,' said David Malpass, former chief economist at Bear Stearns and deputy assistant Treasury secretary from 1986 to 1989," reports Bloomberg.

* The Weak-Dollar Threat to Prosperity: "No countries have devalued their way into prosperity, while many — Hong Kong, China, Australia today — have used stable money to invite capital and jobs. Some weak-dollar advocates believe that American workers will eventually get cheap enough in foreign-currency terms to win manufacturing jobs back. In practice, however, capital outflows overwhelm the trade flows, causing more job losses than cheap real wages create," reports WSJ.

* The Savage Truth About the Shrinking Dollar: "Out-of-control government spending has caused a precipitous drop in the dollar and now we are see it squeezed out in higher gold prices. Our 'weak dollar policy' does not work. It may be good for Wall Street, but it's horrible for Main Street," Swiss America Chairman Craig R. Smith told national talk show host Michael Savage on Wednesday.

* "As the dollar's dominance fades with the emergence of a multipolar world, gold may stand to gain the most of all assets thanks to an unlikely quality -- neutrality. While no major currency is likely to replace the dollar anytime soon, the need for an alternative is clear, and growing," reports Reuters.

* "Growing international chorus wants the dollar replaced as the world's reserve currency, a move that would end the greenback's six decades of global dominance. The dollar has come under attack from abroad as the economic crisis has played out, thanks to the Federal Reserve's decision to flood a seized-up financial system with liquidity last fall," reports WashPost.

* Dollar fall spells BIG inflation ahead: "Your cost of living is getting ready to go up," Swiss America Chairman Craig R. Smith told Neil Cavuto of Fox News Tuesday. "It appears the world is ditching the dollar," agreed Mr. Cavuto. "With Australia raising interest rates .25% early today, they became the first G-20 nation to begin mopping up the excess liquidity created during the global credit crisis to fight future inflation," said Mr. Smith. "Unless the U.S. does likewise, we should expect a sharply weaker dollar and a lower standard of living."

* China calls time on dollar hegemony: "Beijing does not need to raise money abroad since it has $2 trillion in reserves. The sole purpose is to prepare the way for the emergence of the yuan as a full-fledged global currency. "Everybody in the world is massively overweight the US dollar," said David Bloom, currency chief at HSBC. "As they invest a little here and little there in other currencies, or gold, it slowly erodes the dollar. It is like sterling after World War One. Everybody can see it's happening," reports LonTelegraph.

* The demise of the dollar: "In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar," reports Independent.

* Gulf States Deny Secret Plan to Dump Dollar: "The world's oil producers will continue using the U.S. dollar as the currency for buying and selling crude, high-ranking oil and finance officials in the Gulf said on Tuesday, denying a report in a British newspaper," reports FoxNews.

* Farewell to dollar supremacy: "The sun is setting on the US dollar as the ultra-loose monetary policy of the Federal Reserve forces China and the vibrant economies of the emerging world to forge a new global currency order, according to a new report by HSBC," reports LonTelegraph.

* A stronger US economy requires a weaker dollar: "The US dollar will mainly have to depreciate, if a long spell of over-capacity, high unemployment and low growth is to be avoided, vis-a-vis the currencies of the roughly 50% of the economic universe that we call emerging markets and developing countries. China is the largest of these," reports FinTimes.

* Investors in Treasuries, Dollars Defy Common Sense: "Textbook economics suggests that before long, Japan and other Asian nations will start converting their dollars into euro-denominated securities -- or perhaps a new international currency backed by a basket of, say, euros and yen along with dollars. That would mean a significant decline for Treasuries and the dollar. The U.S. no longer will be supreme. Intuition alone should tell investors to look elsewhere for security," reports Bloomberg.

* Dollar's Pain Is Big Gain for Rivals: "The dollar's slump worsened in the third quarter as investors moved their cash into riskier investments in search of higher returns. The greenback may tumble further in coming weeks as investors bet that other countries will raise interest rates before the Federal Reserve," reports WSJ.

* "The dollar should be devalued because the U.S. economy is less competitive than other economies and has higher debt, and some form of SDR should become the world’s reserve currency," said Wilbur Ross, of WL Ross & Co to CNBC.

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