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For years, U.S. Treasury
notes have been a safe place for world governments
to park their foreign currency holdings. But all of
a sudden, the U.S. is running up trillion-dollar
deficits. Now, China is raising concerns about the
U.S. dollar's dominant position in the world
economy. The head of China's central bank a few
weeks ago said the world should consider creating a
new international reserve currency. Russia this
month took a similar position; so did a United
Nations panel.
It's no coincidence that
China (currently hold�s $739.6 billion of US debt),
Russia ($119.6 billion) and other countries are
getting nervous. They realize that these Treasury
bills they have might not be worth so much five or
10 years from now. There might be inflation, and so
I think countries like China and Russia are starting
to rethink whether there should be an international
reserve currency run by some organization like the
International Monetary Fund.
China earns massive
reserves each year with its exports, and it has
effectively tied its own currency to the U.S.
dollar. If the U.S. dollar were to be displaced as
the international currency, Chinese export earnings
could suffer. However China is a big enough player
now that it has to balance worries about its export
sector with concerns about the security of its
reserves. China is now a creditor, a major creditor,
and it will start to think about its interests
globally more as a creditor and less as just an
exporter. Other countries have other reasons for
backing the idea of a new international currency.
They've noticed that as long as the dollar is the
major safe haven, the United States can borrow
hundreds of billions from the rest of the world at
low interest rates. That's a big advantage for the
U.S.
The United Nations
Commission of Experts on International Finance
Reform this week issued a report calling for a new
monetary unit based on an assortment of national
currencies. U.N. panel, says such a unit would give
small countries more access to the money now being
spent on U.S. Treasuries. Right now, governments buy
U.S. dollar assets because they seem like the best
investment. And some economists point out that just
because the world creates an international reserve
currency doesn't mean governments would actually use
it � unless they're compelled to. I wouldn't be
surprised if the Group of 20, at least over the
longer term, seriously takes up an issue like this.
I do think, into the foreseeable future, an
international reserve currency would just take a
margin of the U.S.'s business. It would not supplant
the dollar overnight by any means. Some economists
have suggested creating a new reserve currency to
reduce reliance on the dollar but acknowledge it
would face major obstacles. It would require
acceptance from nations that have long used the
dollar and hold huge stockpiles of the U.S.
currency. Coincidently, China just splashed
headlines once again. Earlier this week China and
Argentina agreed to a $10.24 billion currency swap.
No one is betting on the health of Argentina's
economy these days. Ever since the country defaulted
on its international debt in 2001, confidence that
its economic situation could turn around has been
extremely low. Indeed, in February, when the
Argentine government requested permission to once
again enter its bonds into U.S. capital markets.
Obviously the answer was not unless you have backing
by a platoon of lawyers and Navy.
Why, then, would China
use this week's Inter-American Development Bank
meeting in Medill�n to agree to a $10.24 billion
currency swap with a country whose bonds could be
worth next to nothing by the end of 2010? Two
reasons seem apparent -- one is straightforward, the
other is disturbing. First, as Xinhua reports, the
Argentines can essentially use the RMB (Chinese
currency- renminbi) as extra cash to pay for
imports. But one might note that, since the Yuan is
not a convertible currency, the money can only be
used to purchase goods from -- you guessed it --
China, potentially giving a boost the Dragon's
ailing export sector.
The other reason for the
swap seems more strategic, especially in conjunction
with other currency trades that China has very
quietly signed with Malaysia, Hong Kong, South
Korea, Belarus, and Indonesia over the past three
months.
Beijing�s currency swap
deals are pieces in a jigsaw designed to promote
wider international use of the renminbi, starting
with making it more acceptable for trade and aiming
at establishing it as a reserve currency in Asia,
something that would also enhance China�s political
clout. Combine these actions with China's recent
call to replace the U.S. dollar as the international
reserve unit, and it starts to look like this
currency swap has nothing at all to do with
Argentina.
The RMB returning from
abroad to China will help its export industries, but
the RMB will not become a reserve currency in the
modern global markets until it is allowed to be
fully convertible. Since the Chinese during good
times and bad have been extremely reluctant to allow
their currency to float freely in the open market,
any attempt at achieving reserve status would have
to be proceeded by a sea-change in their policy. If
the national pride which requires the RMB to be
under sovereign control should ever switch to the
national pride of being the world's reserve
currency, then China might float the RMB.
Now Argentina has the
money to buy Chinese cars, Chinese toys, Chinese
furniture, Chinese foods, et al, and the Chinese
have a cheap source of nearly-worthless wall paper.
For a measly $10B, China has Argentina's votes in
the UN forever.
It is scary to say the
Chinese control inevitably hold the fate of the $US
dollar being the number three debt holder
(institutional, US government arm, or country). The
Chinese know we are wiping (diluting) our debt to
cheap borrowing devaluing the dollar in the long run
increase our export influence which leads to a long
period of inflation commodities such as Agriculture,
precious metals, and oil rise.
Below is a link of ETF
currencies. Not to be pessimistic or support �Dr
Doom� - history has always repeated itself, you
print more $$$ in turn devalues the currency. The
question is when will the US government officially
commence easing the dollar�s strength? It�s obvious
the government is supporting the dollar�s strength
for the interim. It�s an early calling one may say.
To hedge against a worthless dollar I continue to
advocate, without entering the Forex currency market
because of its complexity, an ETF such as UDN
(Dollar Down) will make matters effective and less
aggravating. It�s not a coincidence Powershares
created this derivative for a purpose. Don�t miss
out on the opportunity to hedge the risk.
http://etf.stock-encyclopedia.com/category/currency-etfs.html
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