The United States dollar! Is anyone paying attention? The greenback is slipping. But in all the commotion hardly anyone seems to notice. We checked this morning and found the euro priced at nearly $1.33.
What could go wrong? Well, the U.S. dollar could continue slipping.
Now, let us imagine that you have the world’s biggest stash of money, which today is more than $1 trillion. No one ever had such a big pile. But let us imagine that the money isn’t really yours. You have been put in to manage it on behalf of the People’s Republic of China. And if you lose it, the people aren’t going to be very happy.
Now, about 70% of that money – $700 billion or so – are in dollars.
You have already gone on record as saying you intended to diversify out of dollars. You expect to do it in an orderly way. But with the dollar going down, you realize that when you finally do diversify you’re going to get less for your dollars than you could get now. In fact, if the dollar falls 5 cents against the euro, you have effectively lost 5% of your dollar holdings – or $35 billion. Hmmmm…what will the people say?
What if the dollar goes down 10%? Hmmm…now you’re talking serious money.
Of course, this is not the first time we have posed this question: Why don’t the people with serious money at stake move to protect themselves? And how come the dollar has, so far, resisted our predictions. With a current account deficit at 6% of GDP, it seems obvious that the dollar must fall. So must it fall when the carry traders unwind their trades. Many borrowed yen to buy dollars. When they get out of their positions they will have to sell dollars and buy yen. The dollar should fall. But it doesn’t. Or it hasn’t. Yet.
There is always tomorrow. Time will sort it out.
for The Daily Reckoning Australia