Forex News: Words say Everything - Its how you read them that changes the meaning

Tuesday, June 30, 2009

I was going to write yesterday about how the pattern in which the calls for the dethroning of the US currency are made always has a follow up, half hearted retraction.

I did not, partly because it was obvious and partly because this story is getting old and tiresome as a re-run of a TV sitcom from the seventies. This, however, was the case yesterday as China’s Central Bank calmed the markets by declaring that their monetary reserve policy (and keep an eye on that word “monetary”) has not changed.

What they did not say was that they back the sovereign Dollar and love the idea that 2 Trillion Dollars worth of their assets are invested in the Dollar, but we will go back to this in a little bit.

Forex online junkies can recall not too long ago, when the BRIC nations (Brazil, Russia, India and China) met, there was a call by the Russian President, Dmitry Medvedev, to establish a global bond system through the IMF as an alternative to the Dollar. Later on he “clarified” his point by saying “in addition to” the Dollar.

Not too long before that, was the Russian Finance Minister in Italy making a comment about how the world needs a new reserve currency as the Dollar “has become debt weighted” and a day later the statement again was “clarified” by Moscow which said that the Dollar is and will be the primary Russian reserve for a while (specifically because the IMF bond will take a few years to implement – but not many actually realized that).

This pattern of jab and retreat has played out time and again, and it is because the knee jerk reaction to the Dollars vulnerability and the second world’s absolute resentment of the US has caused conflict in Central Banks around the world.

The fact is, even the retractions are not retractions. Let me go back to the word “monetary” that the Chinese Central Bank used, and let us look at some facts. Now, while their policy might not have changed, being that the proportions of their holdings were left intact, their reserve policy as a whole has shifted to include tangible assets. And thus, the dollar dump has begun…

China, which held over 2 Trillion Dollars in Dollar related Assets in January – about 50% of their reserves, has been using those dollars to purchase raw materials, natural resources and precious metals. In fact, China has gone on such a spending spree, they now accounts for nearly 50% of Australia’s natural resource commodity exports, one of the reasons why Australia is not doing so bad considering the rest of the world.

It is not that the Chinese have changed their monetary policy – the proportions might still be the same, however they seem to have changed their overall reserve policy – opting for things rather than paper.

Russia is also playing this game, only 1 year ago they had about a 1/3rd of their currency reserves in the US Dollar with the total reserves that they had estimated at around 800 Billion. Today, Russia still maintains about 1/3rd of their reserves in the USD, but their overall reserves have shrunk to an estimated 500 Billion.

Oddly enough, their Gold, Platinum and Silver holdings have increase by about 250 Billion Dollars – meaning that they have been diversifying their overall reserves with commodities – just like the Chinese.

What does this mean for Forex traders? It means simply that there is a target on the USD – and while the US’s creditors are trying to find a way out, they need to do so delicately so, as not to disrupt the value of the US on the Forex – a weak Dollar does them no good.

But, as they continue to “diversify” their holdings, keep in mind that more Dollars get added to the market system – watering down the value and inflating the currency. I would anticipate a 5-10% minimum inflation rate in the US in the couple of years – I personally think it could get even higher than that.

As the BRIC’s throw Bricks and then claim ‘it was an accident” the next day – the plans are in the works to dethrone the Dollar. It is coming, be prepared.


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