US Dollar Vulnerable to Interest Rate Cut, China Dumping US Bonds

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As the dollar falls, so does the wealth of dollar holders – particularly Americans. We checked this morning and found the dollar had dropped to over US$1.38 per euro. Last week, we paid US$5 for a cup of coffee in London. And the price keeps going up.

Why is the dollar falling?

Speculators, investors, and central bankers have figured out that the US government and the Bernanke Fed will not protect the dollar – not when millions of Americans are having trouble making their mortgage payments. The US money supply is increasing – nearly five times faster than GDP growth. And now, fearing a Japan-style deflation, the Fed is likely to cut rates later this month.

The Chinese have one of the largest dollar piles in the world.

“Is China quietly dumping US Treasuries?” asks Ambrose Evans-Pritchard in the English press.

“A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.”

The report continues:

“Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone.

“‘This comes as a big surprise and it is definitely worrying,’ said Hans Redeker, currency chief at BNP Paribas. ‘We won’t know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don’t seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros,’ he said.

“Two top advisers to the Chinese government gave strong hints in August that Beijing should use its estimated $900bn holdings of US Treasuries and agency bonds as a ‘bargaining chip’, words taken as an implicit threat to trigger as US bond crash if provoked.”

The Chinese have denied it, of course. But betting against the U.S. dollar has been one of the surest gambles you could make over the last 35 years. Now, it is probably still a good bet.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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8 Comments on "US Dollar Vulnerable to Interest Rate Cut, China Dumping US Bonds"

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Pete
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Don’t you think that the Federal Reserve in the US creating all this new money out of this air, diluting the money supply by funding this 1,000,000,000,000.00 (One Trillion) empire they’ve got going plus the 100’s of billions of dollars they spend on war in iraq and afghanistan has anything to do with their slumping dollar? Where do you think inflation comes from in war time? Look at the charts, inflation is created out of a devalued dollar and always happens in wartime. And why wouldn’t they dump there US treasury bills? Who in their right mind would want to… Read more »
Pete
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hey ‘Pete’, please use a nickname other than mine. Cheers!
(or don’t, its not like i care about some form of reputation)

Pete
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Oh, and ‘Pete’ in response to your comments, there are many reasons China cannot ‘dump’ their bonds so simply. Firstly, they are not the only country that has them and this would affect political relations, secondly they would risk screwing up their own economy by doing it. If you think it is simple, it is not. These countries (I believe China, Japan, Russia and others) know their predicament. They have their reasons for not selling up quickly…perhaps they want the USD to survive.

Pete
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Huh?…I use the name Pete cos that’s my name..I figured I was the first to comment on here and had no idea you even existed but aside from that I agree with you..Why would China wish economic collapse of the country that buys most of China’s production and crap that comes out of their sweatshops ie; Nike. If the US was to fall I gather this would have a major impact on their economy also. But the question is why do we continue to allow central banks to have the authorisation to devalue a dollar? Their main job is to… Read more »
OtherPete
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Pete, you said: “But the question is why do we continue to allow central banks to have the authorisation to devalue a dollar?” I think this is because we think we have a choice, but in fact do not (not without education and organisation). Australia and the US essentially have two party politics, which is a choice between two evils. I once heard someone say on TV that they would vote for Howard, because “better the devil you know”. I know a lot of people that think there are virtually no differences between Australian political parties… It is sad but… Read more »
Zaphod
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Ok who is the real Pete?

Pete
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I am Spartacus!

Pete
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So you are aware that we have a corrupt money system designed to allow necessary hardship on the people? If so, when is someone gonna stand up and demand this lunacy to end..I know this goes really deep and stems back to people that truely benefit from this form of slavery.. The only way to truely protect yourself is to learn to live off the land, get out of debt and protect your home, cos I sense that things are going to get extremely bad. How bad I’m not sure but enough pressure to make a majority of the population… Read more »
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