Thursday, October 29, 2009

Dollar In Crisis

Weakening Dollar

Dollar has been under heavy thrashing at the international arena ever since the outbreak of the so-called financial tsunami in mid-September of 2008 following the collapse of Lehman Brothers Holdings Inc., a giant investment bank in the states. The meltdown of the whole financial system in U.S. was contagious, leading the major economies worldwide to sink into crisis.

The fundamental cause of the tsunami-scale financial turmoil was the burst of the subprime mortgage bubble. Following the bombshell, U.S. fast slowed down and subsequently slipped into recession at a critical level not seen since the Great Depression in 1930s.

The U.S. government reacted with quantum monetary easing, a measure tantamount to printing dollars to shore up the dwindling economic growth. By rescuing the technically bankrupt banks and stimulating the fast weakening economy, the government had to dip further into the debts to come out with trillion-dollar packages. Inevitably, downward pressure started to build up on the dollar value, with the resultant effect of the greenback having to face severe sell-down.

U.S. is already the world’s most indebted nation, with the outstanding public debts standing at a gigantic sum of 11 trillion dollars. As per U.S. National Debt Clock, the National Debt has continued to increase an average of US$3.9 billion per day. As such, the confidence the investors have in the dollar is thinning day by day as the gruesome debts pile up non-stop.

This mountain of debts is of grave concern to the world at large. Some economists have even predicted that the rising debts may be the next crisis!

Over the years, U.S. has been on worsening current account deficits, making the world’s largest economy practically dependent on funds mainly from the new emerging economies for survival. Notable among all the fund providers is China.

When U.S. ex-president George W. Bush took the helm in 2001, he gave strong hints of his preference for a weak dollar policy. This policy was generally viewed as Bush’s vow to trim the widening deficits of the current account.

The greenback embarked on a gradual downward trend from mid-2002. In his tenure as U.S. president, Bush’s weak dollar policy failed to shrink the debts. In fact, the ultra-loose monetary policy during Bush’s presidential terms had bloated the national debts through asset inflation, resulting in increased domestic consumption.

The rising national debts erode the investors’ confidence in the dollar. Way back in 2006, big gurus like Warren Buffet and Jim Rogers gave out wake-up calls, advising investors to diversify out of the dollar.

And now, with the whopping rescue and stimulus packages, the greenback has been suppressed further, making the outlook even duller.

It is little wonder that major creditor like China is getting more vocal on the dim prospects of the currency. The government of China has been harsh on the dollar’s credibility as the world reserve and trade currency.

G7 at its latest meeting pressurized U.S. to view seriously the falling dollar. Although President Obama reacted with a vow to keep dollar strong, he sounded pretty weak and empty. The fundamentals of the dollar just don’t measure up to the president’s call.

The latest figures show that the central banks have been moving their foreign reserves away from the dollar. This is really casting a chill over the prospects of the greenback.

The market talk has it that the States would just happily let its currency fall since it works to its advantage in contracting debts and expanding exports.

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