Do you really think the US will dilute their power in the IMF, knowing that it could hurt them financially in the long run?

Russia made a statement from its Central Bank that they will begin to diversify their reserves, totaling around 400 Billion US Dollar in value, by liquidating some of its US Dollar based assets in exchange for IMF issued bonds. Now, if this were to be taken seriously, rather than political banter meant to rock the financial world, Russia would have to explain a few things. Forex online traders,(while this did affect the trading a bit) need to look at the hard facts before jumping ship on the USD, and take the Russian declaration for what it is - just a hype, nothing more.

First, the US is issuing over 2 Trillion Dollars of new debt in 2009, and they already have closed to 11 Trillion already issued. Of Russia’s 400 Billion in reserves, only 30% are in actual US Dollar securities - cash and bonds - so even if Russia were to diversify their dollar holdings, the 120 Billion US Dollars they are holding would not even crack the surface of the overall US debt market. Second, and this is the most important one, at last check, the IMF does not have the authority to issue bonds just yet. While they are talking about it, it has not been implemented yet, so if Russia were to swap their dollars for IMF backed securities, they first need the IMF to implement the program, which as anyone familiar with large bureaucracies knows this could take years upon years.

Now, just today, the BRIC (Brazil, Russia, India and China) announced that they too would like to diversify and buy IMF bonds. But here is the real deal - the IMF is governed by countries with “voting rights” in the IMF, and this is the breakdown: Brazil has a 1.38% say, Russia has a 2.69% say, India has a 1.89% say and China has a 3.66% say. The US holds a 16.77% say in what goes on in the IMF – they have so much power there, that anytime the Chairmanship comes up, it is the US which has the pick to fill the vacancy.

So with this, let me ask you in Forex Online land: do you really think the US will dilute their power in the IMF, knowing that it could hurt them financially in the long run? Considering that the US Treasury Secretary, Timothy Geithner, is a former IMF head, even with all the changes that Obama has been making, I doubt highly that you will see IMF debt issues anytime soon. Power begets power, and while the US is in financial straits, I doubt they will readily give up some of that power if it will end up hurting them even more down the road.

Read more...

Finexo Market Review

USD

The Dollar gained back some of the recent losses on Wednesday, as it retrieved more than 1% of the recent month long 8% slide against a basket of currencies. A broad selloff in equities revived the safe-haven appeal the US currency enjoys. A falloff in oil prices helped the dollar make sharp gains against the commodity currencies and contributed to the steep rise in the ICE index.

Also contributing to the rise in the Dollar on Wednesday was comments from several Asian governments, reaffirming their policies of investing in US debt instruments. China, Japan, India and South Korea said that even if Moody’s or Standard and Poor’s cut the US’s “AAA” rating, it would not prevent them from investing in the US for the long term.

And, more news for Forex Online traders: at 10:30 PM GMT, the ICE Dollar Index, which measures the Dollar against six other currencies, was up 1.02% to 78.94. The Dollar was up .3% to the Yen to 95.84, up 1.9% to the Pound to 1.6269, up 2.9% to the Canadian Dollar to 1.1109, and up 4.2% to the New Zealand Dollar to .6299.

AUD

The Australian economy grew in the first quarter charged by a 48 year high in international trade. The Aussie GDP rose by .04% from January to March, preventing a recession down under (which is widely accepted as being 2 straight quarters of negative growth).

The rise in trade offset a decline in housing and business, and reduced the need for intervention by the Reserve Bank of Australia, the Aussie Central Bank. The news spurred on the AUD early in the session, although a steep decline in commodity prices Wednesday reversed those gains. As of today, Australia is the only recession free country with a major currency in the Forex market in general and in the Forex Online market in particular.

At 10:50 PM GMT, the Australian Dollar was down 3.1% to the US Dollar to .796, down 1.66% to the Euro to 1.7706, down 2.56% to the Japanese Yen to 76.57 and off .2% to the Canadian Dollar to .8855. The Australian Dollar did rise 1.1% against the Kiwi and was holding at 1.2634.

Chart: GDP Comparison: Australia, US and Japan

The chart below clearly outlines the significance of Australia’s growth last quarter, which is showing a marked increase against the GDP of the 2 largest economies in the world. Commodity prices and China’s hunger for the core exports of Australia, iron, ore and copper, contributed greatly towards this anomaly in the global recession.

Read more...

The Next Big Thing in the Forex Online Market

The British government was rocked last week, first from the scandal involving the insane spending done by their parliament members and then by the warning from Standard and Poor’s that their credit rating – or should we say debt rating – is in peril of being lowered due to huge budget deficits and a rising national debt not seen since World War 2. Did the Sterling fall though? No, it did not – at least not as much as one would think that a “AAA” rated country would fall after hearing that they will soon be subject to higher interest rates and unfavorable terms that comes with anything less than a “AAA” rating. What did happen was quite fascinating, and it was something that I have been saying here for months. The US Dollar collapsed on the news out of England.

Why? You might ask would the currency of a country across an ocean fall on bad news out of the British Isle’s. The answer is quite simple, Forex traders and investors know that the US is next on the chopping block. Although I firmly believe that they should be first based on their crazy debt to income ratio – they are running at a 12 Trillion Dollar deficit carrying a 1.5 Trillion dollar debt and GDP is expected to fall this year – the Dollar enjoys the privilege of being the Dollar, and thus it gets afforded a little more latitude when it comes to these matters.

But the real reason why the US was not first on this list was political and economic in nature. Lower the sovereign debt of the US and countries holding the bonds suffer. As the US will be faced with higher borrowing rates, and will not be afforded the right to offer so much debt and will be regulated as to the terms (10 year, 20 year 30 year), the value of the currency will fall and thus make the value of the debt already out there worth less. This will have a huge impact on the world economy and is probably one of the reasons why China is pondering accepting the Brazilian Real in trade over the US Dollar.

But one last thing on this, it is ironic though that while this might hurt the rest of the world, it will help the US get out of the mess quicker. By deflating the currency it means that the US has to pay less in order to repay a debt. For example, if China is holding $10 in bonds from 1999 those bonds are still worth $10 today – plus interest, however the value of the dollar is lower than it was in 1999 and so the payments that the US makes will be worth less than they were only a few months ago. Forex online blogsters are buzzing about this – and all those trading in the dollar should be aware that this is coming. Don’t say you were not warned.

Read more...