Here’s a sampling of the news stories that helped deal the U.S. dollar a body blow in early November:
• Hedge-fund manager Jim Rogers announced he was selling all his dollars, buying yuan, and moving to China.
• An official in China’s National People’s Congress said China would diversify reserves out of weak currencies and into strong ones.
• Iran and Venezuela proposed OPEC should price oil in currencies other than the dollar.
And last but not least,
• Brazil’s super-model Gisele Bundchen reportedly demanded compensation in euros rather than dollars.
The euro (EUR) rose to new record highs against the dollar, drawing a bead on the $1.50 mark. The British pound (GBP) and the Australian dollar (AUD) were at levels not seen in more than two decades . Even the low-yielding Japanese yen and Swiss franc participated in the move against the once Almighty Dollar.
On Oct. 1, former Federal Reserve Chairman Alan Greenspan commented on the end of the dollar’s dominance, noting the dollar’s status as the pre-eminent reserve currency eroding as the euro and British pound become more attractive.
The dollar has been trending lower for the last five to seven years while the euro has risen since fall 2000, when the major central banks intervened in the foreign exchange market to support it. More than one economist has commented the dollar is in trouble. But is it really?
The weakness of the dollar has transcended finance and entered popular culture. Everyone has an opinion — reminiscent of the late 1990s when cab drivers would offer Internet stock tips. This saturation would seem to imply a mature phase of market development.
Rogers’ stated intention to sell all his dollars and buy yuan is a clear example of the “irrational exuberance” of the dollar bears. His calculations attribute no value to political liberties — while the U.S. will allow Rogers to take his money out, Chinese authorities would likely be less accommodating if he changed his mind.
On Nov. 7, Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress, said, “We will favor stronger currencies over weaker ones, and will adjust accordingly.” This suggests China is going to diversify its approximately $1.4 trillion reserve holdings away from the U.S. dollar. But what incentive does China have, even if that is its intention?
In reality, what China (and other central banks) might be doing is diversifying new reserve accumulations, not its stock of reserve holdings.
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