Posted on 09/19/2007 1:43:56 PM PDT by blam
Fears of dollar collapse as Saudis take fright
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 7:29pm BST 19/09/2007
Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.
"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.
The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.
The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.
There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.
The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit -- expected to reach $850bn this year, or 6.5pc of GDP.
Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.
"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.
"This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem," he said.
Mr Redeker said the biggest danger for the dollar is that falling US rates will at some point trigger a reversal yen "carry trade", causing massive flows from the US back to Japan.
Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, the driving the property market into even deeper crisis.
"If Ben Bernanke starts running those printing presses even faster than he's already doing, we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems," he said.
The Federal Reserve, however, clearly calculates the risk of a sudden downturn is now so great that the it outweighs dangers of a dollar slide.
Former Fed chief Alan Greenspan said this week that house prices may fall by "double digits" as the subprime crisis bites harder, prompting households to cut back sharply on spending.
For Saudi Arabia, the dollar peg has clearly become a liability. Inflation has risen to 4pc and the M3 broad money supply is surging at 22pc.
The pressures are even worse in other parts of the Gulf. The United Arab Emirates now faces inflation of 9.3pc, a 20-year high. In Qatar it has reached 13pc.
Kuwait became the first of the oil sheikhdoms to break its dollar peg in May, a move that has begun to rein in rampant money supply growth.
I smell Soros.
The unintended consequences of the Fed not looking after the momentary system - but looking after Wall Street instead...
Can you say, “$25.00 a gallon?”... I knew you could.............
Yikes.
We ought to just bomb them into the Stone Age - not a far jump for them.
Hasn’t Jim Rogers predicted 25 of the last 3 recessions?
I’m so glad the Fed slammed interest rates. Never mind that it won’t help stem foreclosures or save real estate, which is having a “money confidence” problem, not a “money availability” problem. But the market loves it, and that’s all that really counts?
“What, me worry,” says Burn Yankee. “All your dollars are belong to us.”
Thats funny!
Cyber smell is working
“Jim Rogers, the commodity king and former partner of George Soros, said...”
Of course no foreign money is chasing profits on wall street right?
Nobody seems to want to acknowledge this. It's counterintuitive, that a Fed rate cut can cause mortgage rates to climb, but I'm all but certain that this is what will happen.
I would view the situation as worth watching.
Actually, the confidence problem became an availability problem.
I don’t blame them. The Fed is the fallback policy for some of the flim-flam that happens on Wall Street.
It IS inflationary, and I don’t blame them a bit.
I doubt that the Saudis have $800 billion US. They probably have $800 billion US in investments, but you might as well call it 400 billion British pounds in investments, or 800 billion Canadian dollars for that matter. You can call it whatever you want when you’re dealing with non-monetary assets. It seems highly unlikely that they’d keep a vault with $800 billion US dollars in it though.
LOL, at least.
It’s also counterintuitive that this can be a good situation. We don’t want an inverted yield curve...
Didn't Jim Rogers wig out completely and move to China?
Yet another reason why wahhabism was never in the “axis of evil.”
Seems like big news to me.
Why, everyone was squealing with glee yesterday when the Fed’s cut the interest rate and the stock markets soared. What happened in 24 hours?
Let them eat sand.
Not everybody. There was a lot of squealing, for sure, but not all in delight.
2% foreclosures because brokers made a killing selling to those who cannot afford a mortgage. What is the other 98% doing? Paying their mortgages and going along.
So, what? are you gonna taze me? OWEOWEOWE!
We don’t want an inverted yield curve..... We HAD one.
Did you read the comment I was responding to?
I remember reading somewhere that Rogers and Soros hadn’t spoken in years and there is a lot of bad blood between them.
Besides, Rogers is far richer that I, so why shouldn’t I listen to his investment advice. I would much prefer listening to someone who hasn’t “worked” since his was in his late 30’s, that someone who has to work every day just to stay above water.
I see him frequently on the Fox Satuirday morning business shows, and agree with him quite often. Not on every issue, but just quite often.
After all, he has done it and has the money to prove it !!
Food for thought
I wasn't squealing with delight; it struck me as an error, and possibly a serious one.
Yet another “dollar collapse” story, yet again Jim Rogers makes an appearance, and yet again it’s brought to us by Ambrose Evans-Pritchard - a man who’s never met a problem he couldn’t twist into a doomsday headline and story.
I don’t know if Rogers moved to China, but last I heard he was moving to Asia. Perhaps that will spare us his frequent appearances in breathless news stories about affluent couples who hire Mandarin-speaking nannies for their children. China is the future superpower and will be running the planet, he figures, so Rogers wanted his kiddies to be ahead of the game.
Great news if you are trying to sell real estate in New York or Miami. The decline of the dollar is the top reason why the Manhattan market continues to go up every single quarter.
“After all, he has done it and has the money to prove it !!”
You’d have to be an idiot to make the kind of money Rogers did early on and not be able to grow it considerably even conservatively. He’s spent a good part of the last 15 years or so peddling Sinophile material to the choir, which is additional easy money.
Yesterday's cut was just another successful battle in the War on Savers, which we seem to have fought a dam' sight more successfully than the Wars on Poverty, Drugs, and Terror.
Thanks to him! Having Greenspan comment on the housing market is like having OJ Simpson comment on the justice system.
Check the bottom of your shoes....
So that means my house price will only go down $99 because any more than that will be triple digits.
Here it comes.....watch the Chinese dumb dollars next.
Greenspan and O.J. I’ll make the introduction...
One heck of a time for some sort of domestic terrorist event, too, if economic damage is the goal ... and it is.
The rate cut is cheaper than the alternatives and it is only temporary. Have you ever noticed that currency traders are always extreme in their forecasts. Of course the dollar will weaken with lower rates - that was known. Of course a weaker dollar is inflationary, especially long term. However, with falling house prices (the largest source of wealth in the US) a little inflation is not a bad thing. Also, a yield curve that rewards greater rewards for greater risk is a good thing. Who wants a flat yield curve and who does that serve? Finally, the Saudis are annoyed that their protector is charging for their protection, too bad, so sad.
I'll check back here about 60 days from now and let you know how well this rate cut is working out.
Hey, I just thought it noteworthy that the Telegraph thought it was noteworthy (while irritating to us) to mention (trade on) their source’s former relationship with Soros, as though that makes the guy’s opinion more respectable (as the editors know full well that more than 80%-99% of the readers will not know your little tidbit about the guy).
I want to be a POTUS with the power to throw Soros out of the U.S.
What is the average cost of these homes? My guess if you lower the asking price you will have a lot less homes on the market.
US dollar index rose today.
I guess that's why the DOW gained 335 points yesterday. All those investors "fleeing away" from US markets.
Would a lower dollar make it more expensive to import products to the USA ? and make exports from the USA cheaper ? The sad part is ? this still will not create more jobs since taxes are to high in some areas around the country.
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