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South China Morning Post, Hong Kong

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Yellen Holds the Key to Dollar's Decline (Die Welt, Germany)

 

"The U.S. economy is huge, but so are the debts the country has accumulated over the decades. This year, 317 million Americans will produce goods and services valued at roughly $16.7 trillion, according to IMF estimates. However, federal, state, and local government debt is already higher than that, amounting to almost $17 trillion. ... All experts agree that the future of the dollar critically depends on the new head of the Federal Reserve."

 

By Daniel Eckert

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Translated By Stephanie Martin

 

October 19, 2013

 

Germany - Die Welt - Original Article (German)

The euro could challenge the dollar in its role as reserve currency and China is already calling for an end to U.S. dominance in the financial markets. But the greenback still has a few secret weapons up its sleeve.

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After the most recent shutdown farce, we don't want to know how Washington would deal with its creditors if U.S. Treasury really had no more money. Up to now, because the debt ceiling is not an actual limit of government revenue but merely a political battle line, the only shortages to bring the world's largest economy to the brink of insolvency have been politically induced. For millions of investors around the world, however, the near crash of U.S. government finances represents another warning shot.

 

The United States is of enormous importance to the global economy, and not just as a major consumer and producer. Perhaps of even greater importance is its status as the leading financial power. The dollar is the undisputed reserve currency, and U.S. Treasuries are the preferred method of storing value for companies and institutions around the world.

 

Even before credit ratings agency Fitch threatened to take away America's  AAA rating, numerous financial exchange strategists had already lowered their forecasts for the dollar. For the experts, predictability is what is missing from U.S. politics. In October alone, according to financial news agency Bloomberg, analysts have lowered their forecasts for the dollar by 1.2 percent, after a reduction of 1.7 percent in September and 1.2 percent in August. Such a series of reductions is extremely rare.

 

China is watching the developments with concern

 

Some even go so far as to question the greenback as a reliable global currency. "Lasting damage is being caused to the view that the U.S. currency is the reserve currency," says Bloomberg's Andrew Milligan, head of global strategy at the insurance company Standard Life.

 

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Currency traders aren't the only ones following every detail of political developments in Washington. China also casts a keen (and concerned) eye on developments in the U.S. China's Central Bank holds $1.3 trillion worth of U.S. government bonds in its portfolio. The country holding the second highest amount of U.S. government debt is Japan, with securities valued at $1.1 trillion.

 

Both Asian nations buy dollar-denominated securities to push down the price of their own currencies. A decline in the value of the greenback (which is what the paper dollar is called because of the color on the back of the bill) is something they have to fear. Recently, this prompted a commentator from the pro-government Chinese news agency Xinhua to call for a "de-Americanization" of the financial world. Instead of the dollar, the world needs a "new international reserve currency" that will give greater consideration to the interests of emerging nations.

 

Some observers see the Chinese renminbi growing into this role. Since the exchange rate of Chinese currency was allowed to float in July 2005, its value has already risen by 36 percent against the dollar, and by 47 percent against the pound.

 

 

"Recently, Beijing concluded currency swap agreements with several countries, the E.U. included. This strengthens the importance of the yuan," says Folker Hellmeyer, chief strategist at the Bremer Landesbank. The goal is emancipation from global trade dominance of the greenback.

 

Problems remain

 

Arguments against the dollar go along these lines: Even if a solution to the current budget dispute can be found, fundamental problems remain unresolved. The U.S. economy is huge, but so are the debts the country has accumulated over the decades. This year, 317 million Americans will produce goods and services valued at roughly $16.7 trillion, according to International Monetary Fund estimates. However, federal, state, and local government debt is already higher than that, amounting to almost $17 trillion.

 

It is generally agreed that the United States will probably not go bankrupt, at least not as long as the FED continues to step in with newly-printed dollars. In fact, the Federal Reserve has been doing so zealously since the outbreak of the financial crisis.

 

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Will bond purchases continue?

 

According to the most recent data, the FED holds almost $2 trillion worth of U.S. government bonds. That means that the FED is already ahead of China as largest single creditor of the American state. The U.S. central bank now holds more than 16 percent of all outstanding debt in its portfolio.

 

During the summer, outgoing FED Chairman Ben Bernanke hinted that Treasury purchases would be gradually scaled back. However, there has been no more mention of this since. The turmoil these allusions created in global financial markets was simply too severe.

 

The stock exchanges and currency markets of emerging countries experienced a real slump that was assuaged only after the FED retreated from its course of "tapering" (scaling back of bond purchases). There are strong indications that America is prepared for  further devaluation of the dollar.

 

"If the FED continues to delay throttling back its bond purchases, it will be bad for the dollar, "explains Christian Zima, a pension fund manager with Raiffeisen Capital Management. The liquidity this brings puts the external value of the dollar under pressure, which is another way of saying that the increase in liquidity isn't counterbalanced by an increase in goods and services.

 

New FED chair likely to stay old course

 

However, a continuation of Treasury purchases is precisely what newly-designated FED chief Janet Yellen advocates. As chairman of the Council of Economic Advisers in the 1990s, Yellen backed cheap money labor market policies on the part of government.

 

"The discussion about a new reserve currency has come up repeatedly," says Thomas Stolper, economist with U.S. investment bank Goldman Sachs. Nonetheless, says Stolper, 61 percent of all known holdings of foreign currency are comprised of U.S. dollars. At one point in March, the percentage was 58%.

 

At the time, many expected a rise in the value of the euro. But then came the European debt crisis. Suddenly the greenback, despite its shortcomings, benefited from its status as a "safe haven." The reasons for this are America's large and well-established capital markets, as well as the interactions of powerful Wall Street banks.

 

Not everyone believes in the decline of the American currency.

 

"On the contrary. In recent years, the dollar has again been able to solidify its position as the reserve currency, " emphasizes Ursina Kubli, economist with Swiss bank Safra Sarasin. The most recent figures from the Bank for International Settlements showed that the dollar's share of daily foreign exchange trading volume is significantly higher today than it was in 2010. "The dollar's role as the reserve currency is undisputed."

 

The need for an alternative currency

 

Goldman Sachs expert Stolper recommends a differentiated approach. In his view, if U.S. financial policy continues to be chaotic, the need for an alternative reserve currency may well rise. The leading candidate is the euro, which accounts for 24 percent of all currency reserves.

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"In the post-crisis era, the euro is in a better position to expand its role as reserve currency, Stolper diagnoses. After all, the U.S. budget deficit of 5.8 percent is twice as high as that of the monetary union. And other economic figures also support the Old World rather than the new.

 

China's economy is strong as well. However, despite recent liberalization, its capital markets remain too closed off to establish a global currency. However, in a few years, things may be quite different.

 

All experts agree that the future of the dollar critically depends on the new head of the Federal Reserve. In this, however, past experience suggests caution: Yellen will relieve Bernanke in 2014. Years of change at the head of the FED have usually been the most dangerous for the dollar.

 

SEE ALSO ON THIS:
Handelsblatt, Germany: Why the Dollar is and Will Remain the Key Global Reserve Currency
People's Daily, China: U.S. Game of Chicken Threatens Creditors and Global Economy
Die Zeit,Germany: America's Final Downfall? We Had Better Hope Not!
China Daily, China: Instead of Carping Over its Currency, West Should Thank China
O Globo, Brazil: My Time with America's 'Suicide Bombers'
Le Temps, Switzerland: Budget Deadlock Again Suggests Racist Basis for Opposing Obama
Newsweek Polska, Poland: In Poland and America, Religion Propels the Radical Right
Xinhua, China: Washington's Fiscal Failure Demands 'De-Americanized World'
News, Switzerland: America's 'Terror in a Teapot'
ABC. Spain: The Misguided Demonization of the 'Tea Party' Movement
Hispanidad, Spain: How Spain Can Build its Own 'Tea Party': Copy Sarah Palin
El Pais, Spain: Tea Party 'Endangers Health' of American Democracy

News, Switzerland: U.S. Republicans Wage War on Profligate Hungry Children
Huanqiu, China: America Seeks Growth at the Expense of Emerging Nations

Jakarta Post, Indonesia: APEC to Proceed 'Just as Smoothly' Without Obama
Jakarta Globe, Indonesia: Obama's Canceled Asia Visit May Mean End of U.S. Dominance

Rzeczpospolita, Poland: Republican 'Clowns' Turn America into a 'Laughing Stock'

Polityka, Poland:
Budget Extremists Unforeseen by America's Founding Fathers
Bernama, Malaysia:
U.S. Shutdown Scuttles Obama's Keenly-Awaited Malaysia Visit
Le Figaro, France: Tea Party Takes America Hostage
Independent, U.K.: Has America Ever Been More Divided?
The Economist, U.K.: Will Voters Punish the Republicans?
Guardian, U.K.: U.S. Republicans and Iran's Mullahs
Telegraph, U.K.: Obama Presides Over End of America's Superpower Status
Globe & Mail, Canada: The gravest casualty in America’s debt war
Frankfurter Rundschau, Germany: 'Radical' Republicans Threaten U.S. with Ruin
Tiscali Notizie, Italy: The Fiscal Decline of the 'Apocalypse'
News, Switzerland: Notion: 'Pay Politicians Based on Performance'
Salzburger Nachrichten, Austria: Debt Ceiling Attack By Republicans 'Backfires'
Gazeta, Russia: America's Astonishing 'Battle for the Ceiling'
People's Daily, China: U.S. Game of Chicken Threatens Creditors and Economy
Die Zeit, Germany: U.S. Risks 'Plunging World' Into New Financial Crisis

 

 

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Posted By Worldmeets.US Oct. 19, 2013, 7:59am