The biggest chatter in the markets today is about the article in the Financial Times that talks about the shifting of central bank reserve positions from dollars to euros. Posted on 01/24/2005 11:22:46 PM PST by M. Espinola
The biggest chatter in the markets today is about the article in the Financial Times that talks about the shifting of central bank reserve positions from dollars to euros.
This is something that we have warned about for some time now in previous editions of Daily Fundamentals as well as in our 2005 currency outlook.
Russia has already announced their intentions to shift their mix of reserve allocations. The central banks of oil exporters in the Middle East have also reduced their dollar holdings over the past 3 years.
According to the report, 90 percent of central bank portfolio managers surveyed said that the income from reserve management was important to them.
The decline in the dollar not only reduces the yield that they receive, it can also result in negative real returns if the depreciation of the dollar causes their investments in US Treasuries to be converted back to their local currency at a lesser value than the yield earned. However protecting profitability is not the only reason for central banks to change their mix of reserve holdings. With confidence growing in the euro, central bankers will need to hedge trade exposure more appropriately.
As the currency for 12 countries, the euro is becoming a more predominant player in foreign trade. Although the euro has given back all the gains it incurred following the printing of the FT article, this is a trend that the market needs to pay very close attention to. We are sure that it will fall back to sidelines like it has since late last year, however this should be a factor that continues to favor the euro for the foreseeable future.
(Excerpt) Read more at dailyfx.com ...
The EU will be in civil war in less than 20 years.
Is this the world's future? I hope not!
I sure wouldn't have much confidence in the Euro in the long term, especially when the largest players in the EU have been running high deficits, and the economy in the EU is flat, and has been for 3 years in a row. The higher valued Euro has a negative impact on the GNP, making it harder still to show growth. The Euro will fall eventually, it can't sustain itself on nothing. When it begins to fall, just watch how fast it tumbles when money players start dumping their Euro's. The EU actually needs a lower Euro, not an inflated one.
BINGO
Of course, the US Treasury can counter-attack quite easily by setting a price as against a commodity such as gold, i.e. they would guarantee that $400 USD can always be redeemed for 1 ounce of gold. It would hurt us though, since we too (or at least Congress) depends on being able to issue fiat currency to finance the govt. Remember that Clinton printed up $75 Billion in extra currency just before Y2K, ostensibly to make sure that all the cash people wanted would be available.
The reason is it all depends on perception and speculation.
But a world war it still is.
bttt
Running up insane trade deficits has consequences. These deficits mount to become a multi-trillion dollar external debt.The USD used to be the premier reserve currency. It had no competition. As national banks move to the Euro this will force down the dollar even more. Which theoretically will close our trade gap (deficit) but not when we have a decimated manufacturing sector. We can't just push a button and see abandoned factories come to life
My thoughts exactly. Why ever in the world would central bank managers put money in to an economy that is over-taxed, under performs (perenially) and whose native European populations are not even producing enough children to replace those who are there?
Yes, actually, we can. Factories can be up and running in months.
So far thats our savior, the Eurpeon economies are even worse anf the Japanese are still climbing out of the bubble economy they built from overpriced real estate.
No, you call someone local, with a drain auger. Freepmail me for my phone number, BTW. I charge more, but I am on the same continent...
When the fit hits the shan, it's not going to be pretty. 500k for a dump in Anaheim ?
Yes, actually, we can. Factories can be up and running in months.
Let me put it this way. Our ability to produce is so decimated that when the dollar loses 30% against a weighted basket of world currencies, we won't see out trade deficit go down by a corresponding 30%. However this is what economic theory says should happen in efficient markets. This is how economic theory says trade deficits correct themselves.
Just a collapsing dollar, nothing to worry about.
Actually, the trick seems to be, buy land - on credit, if possible - and be ready to work for a living.
Your milage may vary.
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