What will happen if the U.S. dollar’s reign as the world reserve currency comes to an end?

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Re: What will happen if the U.S. dollar’s reign as the world reserve currency comes to an end?

Postby Abacus » 25 Apr 2012, 12:40

GuyInTaiwan wrote:With the forint and the zloty, isn't that because many of Eastern Europe's economies were in the toilet a year ago?


It's easier to paint an ugly picture if you use a short timespan. Especially of a situation where there is trouble. The US economy is weak and so is the dollar. This should be a shock to absolutely nobody. But this does not mean that a crash is imminent. the US (and the world) needs to get its financial act together though. Everyone seems to blissfully be ignoring the issues.
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Re: What will happen if the U.S. dollar’s reign as the world reserve currency comes to an end?

Postby SillyWilly » 25 Apr 2012, 13:04

Abacus wrote:
GuyInTaiwan wrote:With the forint and the zloty, isn't that because many of Eastern Europe's economies were in the toilet a year ago?


It's easier to paint an ugly picture if you use a short timespan. Especially of a situation where there is trouble. The US economy is weak and so is the dollar. This should be a shock to absolutely nobody. But this does not mean that a crash is imminent. the US (and the world) needs to get its financial act together though. Everyone seems to blissfully be ignoring the issues.


It does seem peculiar that the USD isn't doing better relative to even the EURO considering the ECB basically created close to a $1 trillion worth of money with their LTRO this year. It doesn't suggest the dollar is doomed, but that it's weaker than most people believe and might be heading for further weakness when QE3 is finally announced. Maybe the market is already discounting a QE3 and that's why the USD can't show more strength. Should be interesting to see how the USD reacts to QE3 since most gains in the USdollar Index were made after QE2 expired last June, rallying from 73 to 80.
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Re: What will happen if the U.S. dollar’s reign as the world reserve currency comes to an end?

Postby SillyWilly » 15 Aug 2012, 13:19

Source: Wall Street Journal: http://online.wsj.com/article/SB1000087 ... 90478.html
Source: http://goldsilver.com/news/africa-just- ... =read+more

Africa Just Says "Nein" To The US Dollar

AUGUST 13, 2012

Last week we presented the aftermath of the very much unannounced "Conference of Beijing" as a result of which Africa has been slowly but surely converting to a continent controlled almost exclusively by China. However, there was one thing missing: even as China has been virtually the sole source of infrastructure funding in Africa, the continent has long been a legacy dollar preserve, which obviously means renminbi penetration and replacement would be problematic to say the least. As it turns out, this too is rapidly changing: as the WSJ reports, Africa is increasingly just saying "nein" to the USD. "African countries are trying to shoo the U.S. dollar away, even if it means threatening to throw people who use greenbacks in jail. Starting next year, Angola will require oil and gas companies to pay tax revenue and local contracts in kwanza, its currency, rather than dollars. Mozambique wants companies to exchange half of their export earnings for meticais, hoping to pull more of the wealth in vast coal and natural-gas deposits into the domestic economy. And Ghana is seeking similar ways to reinforce "the primacy of the domestic currency," after the cedi plummeted more than 17% against the dollar in the first six months of this year. The sternest steps come from Zambia, a copper-rich country in southern Africa where the central bank has banned dollar-denominated transactions. Offenders who are "quoting, paying or demanding to be paid or receiving foreign currency" can face a maximum 10 years in prison, the central bank said in a two-page directive in May." Is it time to dump the EUR in hopes of a short covering rally that continues to be elusive (just as Germany wants) and buy Zambian Kwachas instead? We will wait for Tom Stolper to advise Goldman clients to sell the Zambian currency first, but at this rate the USDZMK [15]may well be the most profitable currency pair of the next 3-6 months.

Image
Why is Africa angry at the one almighty Greenback?
The moves aim to strengthen thinly traded currencies and steer more capital into isolated financial markets. But the new rules are an abrupt change for foreign and local companies used to doing business in U.S. dollars.

In other words, Africa is finally pushing for its own capital markets, rudimentary as they may be. One wonders just who may be pulling the strings behind this very quiet but very crucial development. But one thing that is certain is that the traditional operations for legacy companies in Africa is about to change for good:

"There will be an adjustment period," said Mike Keenan, an African currencies analyst at Absa Capital, a South African subsidiary of Barclays PLC. "But the story with Africa and commodities has been one where the proceeds kind of circumvent the country. These authorities are trying to clamp down on that."

Zambia's central bank sees upside to a strong and liquid kwacha.

The move to promote the currency's use gives authorities leverage over monetary policy they lacked without control of the dominant market currency. The crackdown also could bring local banks new business in hedging instruments and foreign-exchange transactions.

"The kwacha is legal tender," said Caeser Siwale, chief executive in Zambia for Renaissance Capital, an investment bank. "There tends to be a different yardstick for us," with big companies expecting small economies like Zambia to live with a reliance on foreign currency that would never happen in Europe or China, he added.

In Zambia, the measures appear to be working. Heightened demand for kwacha pushed the currency to its highest level in more than a year in July, when it reached 4,640 to the dollar. It has slipped a bit since then.

So why go long the ZMK (and short the USD)? Here's why.

Fueling the demand were foreign-owned manufacturing and mining companies racing to acquire kwacha even as they asked the government to reconsider the policy. The companies complain it make operations more expensive and cumbersome.

"It might be hard to find kwacha when you need it," said Frederick Bantubonse, general manager of Zambia's Chamber of Mines. Mining companies also are worried about the cost of hedging their copper production against kwacha volatility. The group has appealed to government to limit the types of transactions affected by the move.

In the long run, strengthening the kwacha by decree will take less time than demonstrating political stability and a commitment to controlling inflation, said John K. Wakeman-Linn, mission chief for Zambia at the International Monetary Fund.

And while it is unlikely that the Kwacha has to fear becoming a carry currency, the short USDZMK may be at best a short-term trade. At least until China reveals its full plans.

In the long run, strengthening the kwacha by decree will take less time than demonstrating political stability and a commitment to controlling inflation, said John K. Wakeman-Linn, mission chief for Zambia at the International Monetary Fund.

"I don't think it's necessarily an adverse policy, but I don't see it providing a lot of additional long-term confidence in the kwacha, either," he said. "Regulation like this cannot substitute for policies that generate confidence in the market."

Those who are leery of going long just one African country can diversify their holdings. Into Ghanaian Cedis, aka GHS (1 year chart of USDGHC here [16]).

Policy makers elsewhere in Africa are watching Zambia. Ghana, another fast-growing African economy with rich mineral deposits and a nascent consumer class, also is seeking to boost its currency's value.


Since May, Ghana's banks have had to keep all of their deposits at the central bank in cedi, rather than a mix of cedi and U.S. dollars. The switch encourages banks to seek deposits in cedi rather than foreign currency, according to Millison Narh, a deputy governor of the Bank of Ghana.

The central bank's pro-cedi policies aim to make life easier for people like Sterre Mkatini, who recently lugged a backpack filled with $8,000 worth of local currency to a nearby bank to pay one year's rent upfront. Many landlords demand such payments to sidestep high inflation.

Of course, there are risks:
Kwaku Asente Addo, a cashier at Penta Forex Bureau, isn't sure Ghana's government can or will do much to purge the greenback. "They can't do that; they're bluffing," he said.

Maybe they are. But if, indeed, China is pushing the strings, maybe they aren't.

Finally, here is the one currency to really watch:

A central bank ceiling on over-the-counter dollar transactions at banks has sent Ghana's class of China-bound traders into street-side foreign-exchange bureaus that normally cater to fanny-pack-clad tourists. Chinese importers often show up just before flights back to China desperate to buy $100,000.

How long until China will welcome all African transactions to settle in CNY?

Either way, keep a close eye on Africa. Things are heating up there quickly.
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Re: What will happen if the U.S. dollar’s reign as the world reserve currency comes to an end?

Postby Mr He » 15 Aug 2012, 14:45

The strength and credibility of the US$ is built on the strength of the US economy.

The US economy is going through a painful transition right now, IE away from importing everything and pay with paper to making more, exporting more, importing less, and pay with goods.

The US consumer is at the same time paying off debts, spending less, but saving more.

All this transition hits growth now, however it bodes better for the future than the cassandras say. I would not rule out the US$ now.

The Euro and the eurozone is in fits and starts going through the same, and the EU too will shine again, once they have gone through this shitty path.

I have read so many cassandras over the world, it seems that when we are at the top of the bubble some idiots will claim that "This time it is different". When we are in the middle of the hangover, but working our way out of it, then it's not just seen as a phase which we will recover from it is seen as "This time it is different".

Equally stupid every time.

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This post was recommended by headhonchoII (15 Aug 2012, 15:08)
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Re: What will happen if the U.S. dollar’s reign as the world reserve currency comes to an end?

Postby Elegua » 15 Aug 2012, 14:57

Thanks to Merkle and the German taxpayer, the death of the dollar has been postponed.

Europe is proving the Econ 101 principle that you can't have a currency without a matching transfer state and harmonized commercial system.

Let's make CNY fully convertible before we try to be a reserve currency.
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