First, please give full credit to Dkos member
timberhoood for pointing me to this story.
Asian countries need to prepare for a possible sharp fall in the dollar and should allow their currencies to appreciate collectively if that happens, a senior Asian Development Bank official said Tuesday.
"Any shock hitting the U.S. economy or the global market may change investors' perceptions, given the existing global current account imbalance," Masahiro Kawai, the bank's head of regional economic integration, said at a news conference.
"Our suggestion to Asian countries is, don't take this continuous financing of the U.S. current account deficit as given. If something happens, then East Asian economies have to be prepared."
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Kawai said the chances of a rapid fall in the dollar were still small, but it could cause a significant turmoil in Asia if it happened.
"If the U.S. dollar goes down in the future, it would be best for East Asian countries to allow appreciation collectively," so that the costs of adjustment could be divided among them, he said.
Asia and the US have engaged in a mutually beneficial and mutually detrimental trade relationship for some time. Asia has informally pegged their currencies to the dollar. To do this, the Asian central banks have either purchased or sold large amounts of dollars to affect the exchange rate of their respective currencies. This is the primary reason why Asian Central banks have such large dollar holdings.
This has helped Asia become a major leader in world exports, which has obvious benefits for their respective economies. The problem is now the Asian Banks have a ton of US debt.
At the same time, the US has benefited because this relationship allows the US to finance its international trade deficit. A trade deficit simply means a particular country is purchasing more than it produces. The country can use savings or debt to finance the deficit. Because the US has little savings anymore, it has to finance the deficit with debt. Hence, the Asian Central banks have large holdings of US Treasury bonds.
Starting about a year and half ago, the Asian banks have started to look for ways to divest themselves of this situation. Japan, China and South Korea have all publicly stated they were looking to move away from the dollar. While all three quickly denounced these statements, their actions after these statements - their slowing or halting of further US bond purchases - indicates they have indeed looked for a way to move out of the dollar peg.
Asian Banks appear to have leveled off the amount of Treasuries they are willing to hold. Japan has slightly decreased its holdings of US Treasuries from $667 billion in June 2005 $640 billion in March 2006. Over the same time, China has increased its holdings from $297 billion to $321 billion - a yearly gain of $24 billion is hardly a massive increase. The data indicates at the very least the Asian Central Banks have become cautious about their respective holdings.
This is not a stealth story in the currency markets. Since the beginning of 2006, the dollar has lost about 5% versus the yen and 8.25% versus the euro. More importantly, the dollar has dropped below the 200 day moving average on both charts, indicating a change from bullish to bearish market psychology. Traders are obviously concerned about the dollar's value.
Finally, there is this quote from an interview with James Turk, the founder of Goldmoney.com from this week's Baron's. Turk is obviously very bullish on the gold market. However, he states it's not that gold has risen:
There are problems with the dollar, and that's being reflected in a higher gold price. So, truth be told, it's not that gold is going higher - that that the dollar is going lower.
Gold is a standard "safe haven" investment, meaning people invest in gold when they are nervous about the financial markets. Since September of last year, gold has increased from $440/ounce to $661/ounce - an increase of 50%. If Turk is right, than there is a great deal of concern about the dollar.
The bottom line is there are numerous chinks in the dollar's armor. On the plus side, the dollar is still the world's reserve currency of choice. On the negative side, a lot of people are looking for ways to exit the dollar without depressing their own dollar assets. It's a tricky dance to say the least.