Syria Dumps US Dollar Peg As Global Confidence In Greenback Falls

Both the Dow and the S&P made new highs overnight in American trading. Yet something strange is going on with Team America’s financial markets. Financial assets are rising to new records, in US dollar terms. But the greenback itself isn’t getting any love from international investors. Hmm. Why would that be? Our dollar rally prediction has not materialised. Why?

Here’s the thing. Rising US stock prices don’t do foreign investors any good if the currency those stocks are rising in is itself falling. Stocks rise. Dollar falls. If the dollar falls faster than stocks rise, that makes the rise in US stocks irrelevant for international investors looking for a real return on their cash. Or, in plain terms, a falling dollar makes US stocks a losing investment for foreign investors.

Why is the dollar falling? You could write a whole book about that. In fact, my colleagues Bill Bonner and Addison Wiggin did! They called it “Empire of Debt,” and showed how the US government, through the management of its currency and its balance sheet, has completely undermined global confidence in the dollar.

You probably already know this. In fact, everyone in the world seems to know it. But until now, it’s been too much trouble for most global investors to do anything about it. Everyone uses dollars. It’s the world’s reserve currency. Switching to something else is impractical and, as Al Gore might say, inconvenient.

But the truth is, holding dollars or pegging your currency to the value of the dollar has caused inflation worldwide. Countries that have pegged their currency to the dollar have essentially imported US monetary policy. If the US increases money supply, dollar-pegged countries must do the same thing to maintain the peg. Thus, when the Fed inflates, China, Syria, and anyone else tied to the dollar inflates too. It’s like sympathy binge eating, only with money.

If it sounds like a destructive race to lower purchasing power, or as my friend Greg Weldon calls it, the global competitive currency devaluation race, well it is. But the race may be over for some nations.

Syria has unpegged from the dollar. “The decision is final,” said Syria’s central bank Governor Adib Mayaleh. The country will link its currency to a broader range of other currencies that are not the US dollar. “This will help stabilise the Syrian pound and bring down inflation,” Mayaleh said.

No offence to Syria, but it’s a bit player on the global monetary scene. It doesn’t even have any huge oil surpluses. So why does it matter? The answer comes at the margin.

Syria doesn’t sell oil or consumer goods to the US. Therefore, Syria has no huge US dollar profits in can recycle back into American markets. Syria, in other words, gets all the inflationary, wealth-destroying ills of being linked to the dollar, and no real benefits. So it’s shrugged off the regret you have when you say goodbye to something familiar and moved on. Will the rest of the world follow?

Not all at once. According to the International Monetary Fund Data, the dollar accounts for 64.7% of global forex reserves. The euro is barely a third of that. There is no other major contender, although a basket of commodity or energy currencies are certainly attractive (national paper backed, indirectly by revenues from real resource wealth). Truth be told—holding the paper currency issued by a nation state and managed by a central bank may not be the preferred method of storing wealth in the world these days.

Dan Denning
The Daily Reckoning Australia

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