Fears of dollar collapse as Saudis take fright

[Fish]

http://www.telegraph.co.uk/money/mai...cnsaudi119.xml

Fears of dollar collapse as Saudis take fright
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 8:39am BST 20/09/2007

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
China threatens 'nuclear option' of dollar sales

Ben Bernanke has placed the dollar in a dangerous situation, say analysts

"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.
"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.
The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.
The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.
There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.
The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.
Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.
"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.
"This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem," he said.
Mr Redeker said the biggest danger for the dollar is that falling US rates will at some point trigger a reversal yen "carry trade", causing massive flows from the US back to Japan.
Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, the driving the property market into even deeper crisis.
"If Ben Bernanke starts running those printing presses even faster than he's already doing, we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems," he said.
The Federal Reserve, however, clearly calculates the risk of a sudden downturn is now so great that the it outweighs dangers of a dollar slide.

[Skybird]

Oh, no longer a "magic cheque-book"? (see: R. Newman: A history of oil)

[bradclark1]

China threatens 'nuclear option' of dollar sales

Isn't this like a serious threat? (showing my economic ignorance)

[SUBMAN1]

I'd like to call this a 'dollar correction' that is long overdue.

-S

[Rockin Robbins]

The strength of the American economy is much more than the strength of the American government. Also the interdependence of world economies makes such offensive economic warfare more dangerous and costly to the attacker than the defender. America can afford losses on a scale unimagined by the world. That was the lesson of WWII. Pity it has been forgotten.

Wishing for the weakening of the US is understandable. Actually working to produce it is working against one's own best interest.

[Skybird]

Originally Posted by Rockin Robbins

The strength of the American economy is much more than the strength of the American government. Also the interdependence of world economies makes such offensive economic warfare more dangerous and costly to the attacker than the defender. America can afford losses on a scale unimagined by the world. That was the lesson of WWII. Pity it has been forgotten.

Wishing for the weakening of the US is understandable. Actually working to produce it is working against one's own best interest.

Not often I disagree with a posting so totally and completely!

In a short while, China will be almost unattackable by economical means, and not few analysts would claim that it already is right now. It is autark concerning all goods that are needed by the population to survive, especially food production, agriculture. and if it ever starts to get rid of it epical, monumental, biblical dollars reserves, that will a.) deliver a direct blow to the US economy and finance markets that the US has nothing to defend against and cannot compensate, and b.) it will cause a global avalanche of dollar sales that will increase the American catastrophe even further. since some years, I consider the American willingness to allow this massive vulnerability to grow over so long time to such ridiculous peaks as maybe the greatest strategical mistake in all it's history. I say that without any malicious joy, since that desaster for the US will cause massive disturbance for the european and especially the export-heavy German economy as well. but instead of adressing this lethal weakness, america ignores it and carries on with business as usual, obviously assuming that all nations worldwide will continue to invest into the american capital market for the rest of all time - no effort to seriously consider a strategy to counter this monumental thread. Instead a yelling "Weiter so!".

The Chinese play it silent, and politely. but their determination is as adamant as that of any Western power - maybe even tougher.

What can America do if the Chinese decide to get rid of their dollars (why do you think they have accumulated them so patiently if not as a possible weapon and threat against the US...???). In short: it can do nothing. there is no military option that could be in any way "won", and there is no economical response to counter that move, or to retaliate. That simple. China is unattackable, due to its vital autarky, and its geographical size, the ongoing modernization of it's huge forces, the alreayd great poential of it's navy (that I consider to be constantly underestimated), and the simple fact that it has nuclear bombs and missiles. Sorry to have hurt your egos. The only thing that seriously works against them is demographics. Sounds queer, but the one-child-policy is producing the unwelcomed late effect of an over-aging population.

[flyingdane]

Originally Posted by Rockin Robbins

The strength of the American economy is much more than the strength of the American government. Also the interdependence of world economies makes such offensive economic warfare more dangerous and costly to the attacker than the defender. America can afford losses on a scale unimagined by the world. That was the lesson of WWII. Pity it has been forgotten.

Wishing for the weakening of the US is understandable. Actually working to produce it is working against one's own best interest.

Amazing insight Fantastic stuff.

[Skybird]

Originally Posted by bradclark1

Isn't this like a serious threat? (showing my economic ignorance)

Last time this Chinese option was mentioned in a thread, some months ago, some people were even laughing. I wondered why, and still do so.

every bubble travels upwards to the surface, and when reaching it, it bursts.