Dollar Reaches Breaking Point as Banks Shift Reserves (Update3)

[Joanne98]

Source: Bloomberg

Oct. 12 (Bloomberg) -- Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

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 as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”


Read more: http://www.bloomberg.com/apps/news?pid=20602081&sid=a4x9dIJsPn4U

[BridgeTheGap]

1. Are the central banks thumbing their noses at Obama? I wouldn't doubt it for a minute. n.t

[xchrom]

3. i think there's somebody thumbing their nose at obama in the lounge!!11

you better go find 'em!

[Gman]

9. Politics has nothing to do with this. The profit motive is everything

and it doesn't give a damn who is president. If the US dollar is dragging down the value of their portfolio, they will dump it and buy whatever brings the value back up and either keeps it there or increases the value.

[mmonk]

15. This is a shift away from dollars and a US centric world economy.

This shift may have occurred a lot slower were it not for our damaging behavior and practices in the last decade or so.

[bemildred]

2. Inflation is the only way we can ever pay off our debt,

so of course they will "tolerate" a weaker currency. It's the same thing they did in the 1970s to deal with Vietnam War debt.

[BridgeTheGap]

4. Check this out

http://www.newyorker.com/reporting/2009/10/05/091005fa_fact_cassidy

[bemildred]

6. Good piece.

"Free" markets are not stable, they are inherently chaotic, bubbles and busts are the norm, not the exception. Only rigorous and ubiquitous regulation will keep them stable.

[bemildred]

7. Dupe. nt

[Alhena]

5. Exactly - a weaker dollar is a mathematical inevitability

[Winterblues]

11. I don't understand your logic

Inflation means higher interest rates. We can not afford the Interest we are currently paying on our National Debt and it is the lowest EVER. We are paying now about the same amount as we spend on Defense just in Interest. Imagine if rates go up even a single percent..

[unblock]

12. well the truly idiotic move was the shrub administration financing the debt with SHORT term notes

while rates are low, the government should issue a ton of 30-year bonds so as to finance the debt at low rates for the long haul.

normally, inflation helps debtors because income becomes easier while debt is fixed. for instance, a mortgage might be at a fix interest rate while salary increases from higher cost of living adjustments. in any event, the house value presumably increases along with inflation.

but this only works if you don't have an adjustable rate mortgage or otherwise have to refinance your debt. which is why the shrub administration's move to shift much of the debt to few-year notes was horrendous.

obama & co. could fix this by issuing a ton of 30-year bonds now, but that drives up long-term interest rates, something they're loathe to do while the economy is all sucky. which in turn explains why the shrubbies did what they did. it helped keep long-term interest rates artificially low for them and screwed whoever eventually fixed it.

[bemildred]

13. True, it might not work as well as it did last time.

I guess you have to make sure the currency inflates faster than the interest rate to stay ahead. Which is essentially a matter of printing money faster than inflation devalues it. A sort of "Red Queen" situation. But then you have the advantage of paying off all the fixed-rate debt with devalued currency. And it bears remembering that the government and quasi-governmental institutions exercise a good deal of control over interest rates, it is easy for them to put a thumb on the scales, depending on what they want to happen. And interest can be taxable income.

[imdjh]

22. Yeah, but the principle doesn't change.

Example. I buy a car that I can't really afford. The payment is $500/mo and I make $2000/mo. The dollar becomes weaker, and employers have to pay more to get workers, so when I change jobs next year, I make $3000/mo. Even though the $3000/mo only has the buying power of the $2000 a year before, in paying off old debt, it's a windfall, because I am in essence paying sixty cents on the dollar without defaulting.

[Babyserendip]

14. American should DEFAULT ON ALL ITS DEBT.

EOS.

After...the US becomes the greatest equity investment in history.

[kenfrequed]

8. Hello Derivative crash

At least that is one possible consequence.

[BEZERKO]

10. Increased exports is another possibillity.

[Art_from_Ark]

17. Exports of what, exactly?

[RUMMYisFROSTED]

21. Labor?

[ingac70]

16. The dollar is worth more now than it was last summer...

so what's all this shit whining about its value now?

[Art_from_Ark]

18. It's not worth more against the Japanese yen

In fact, it has lost about 6 or 7 cents versus the yen just since August.

[ingac70]

19. It looks just like it did late last year....

http://www.oanda.com/convert/fxhistory

As far as the yen is concerned.

[Art_from_Ark]

20. I was commenting on your comment about last summer

The dollar did recover somewhat earlier this year, but is now back in a declining trend vis-a-vis the yen.

[robo50]

23. Americans so easily forget that they are only 5% of the world population and

95% of the people in the rest of the world would rather hold Euro's, Yen, even Pounds, instead of the dollar right now.

Of course, 30% of the world lives on less than $5 a day.