Fears of dollar collapse ?
Saudi Arabia, who usually mimics every FOMC move, has refused to cut interest rates in lockstep with the US Federal Reserve for the first time., According to a UK Telegraph article (Fears of dollar collapse as Saudis take fright, September 2007), is signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg. This could potentially cause a cascading chain reaction across the Middle East -- setting off a stampede out of the dollar and towards either a basket of currency, or more likely the Euro.
Last month, this same author was expressing concern that the "Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation."
Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels. It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds. (August 2007)
Before you dismiss the author of both of these pieces as a Dollar Bear, recognize what he has said in the past about the Greenback:
"Disregard all hysteria. The ailing Greenback will not collapse this year, not in ten years, not in twenty years, not in half a century. There is no credible currency against which it can collapse. (Unless you count gold). None of the world's rival power blocs have the economic and demographic depth to challenge American dominance." (July 2007)
That this is the same author suggests that something significant has changed recently . . .
UPDATE 2 September 21, 2007 4:35pm
We revisited this subject in some detail today
UPDATE September 21, 2007 2:04pm
My fishing buddy, David Kotok, does not think the Saudis will "decouple" from the US Dollar
The Euro, the Dollar & the Saudis
Fears of dollar collapse as Saudis take fright
UK Telegraph, 8:39am BST 20/09/2007
China threatens 'nuclear option' of dollar sales
UK Telegraph, 8:39pm BST 10/08/2007
Dollar to collapse?
UK Telegraph, 12 Jul 2007 at 16:48
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Tracked on Sep 23, 2007 1:09:05 AM
I am constantly amazed how the economic pundits seen on CNBC and Bloomberg (excluding Barry, of course) have forgotten Economics 101. You lower rates, demand for your bonds will decline, the dollar will fall. Maybe Ben should talk to the Grad Students who teach Econ 101 instead of listening to Kudlow and Crammer.
Posted by: edhopper | Sep 20, 2007 10:37:57 AM
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