Tuesday, June 2, 2009

China Business News Disses Dollar

AS Geithner makes nice with Chinese business leaders, China Business News editorializes about the huge deficit that the U.S. will face and the possibility that the U.S. dollar will lose its position as the world reserve currency:

The US dollar index, which touched its lowest point of the last five months on Friday, has dropped by 1.5 percent in just one month. This is the dollar's biggest monthly slump since March 1985. Investors said the capital, which once poured into the dollar market when the stock market was in panic thanks to the financial tsunami, are now retreating from the dollar and seeking higher profits in other assets.

Another reason for the dollar's weakness is the grim prospect facing US public finance. Investors are worried about the US government's record budget deficit. The Barack Obama administration may have to issue a mammoth $3.25 trillion of T-bills to fill the financial black hole of such a massive deficit. This is bound to scare investors away from the dollar-denominated long-term treasury bills.

When the interest rate is virtually zero and other traditional options have been exhausted, the Federal Reserve has no choice but to resort to "quantitative easing" and buying of T-bills. But it will swell the supply of base money, and thereby heighten the risk of devaluation of the dollar.

Though the devaluation of dollar may be good news for US exports, it will erode investor confidence, and might even lead to the collapse of the dollar's hegemony. Evidently, the falling dollar is an ominous sign looming large over Geithner's mission.

No comments:

Post a Comment