Monday, July 12, 2010

Central banks start to abandon the U.S. dollar

There are those who would argue that the financial crisis was caused by over-enthusiastic worship of the Almighty Dollar. Call it brutal financial karma, but that church is looking pretty empty these days.

A new report from Morgan Stanley analyst Emma Lawson confirms what many had suspected: the dollar is firmly on its way to losing its status as the reserve currency of the world. We already knew that central banks have preferred gold to dollars, and that they're even selling their gold for cash; now, according to Lawson's data, it seems that those central banks prefer almost anything to dollars.

Lawson found that central banks have dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this "unexpected given the global environment." She adds, "over time we anticipate that reserve managers may reduce their holdings further."

What is surprising is that the managers of those central banks aren't buying traditional fall-backs like the euro, the British pound or the Japanese yen. Instead, she suggests they're putting their faith in other dollars - the kind that come from Australia and Canada. The allocation to those currencies, which fall under "other" in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the U.S. dollar allocation.

Call it diversification, if you must, but the trendline indicates that central banks are finally putting their money where their anti-dollar mouths are. The dollar has been in free-fall since 2007.
Read the rest here.

Hat tip: Serge


gdelassu said...

I have two brief responses to this article:

1) I can hardly blame central banks if they have more confidence in Canada than in the U.S. I am an American and I love my country, but I have more confidence in Canada right now, because their political system is not so dysfunctional as our own. They can deal with their fiscal problems like adults, which is more than can be said for us.

2) That said, I am not sure that our "reserve currency" status is really all that big a deal. Indeed, it stands to reason that being the reserve currency of the world makes our currency more valuable (people desire American dollars simply for the sake of having them), which in turn makes our exports slightly less competitive. I think we should actually welcome a downgrade in the value that the world ascribes to the U.S. dollar.

Visibilium said...

Lawson is an idiot whose predictions consist in extrapolating cyclical phenomena. I suppose that she finds too much career risk in making predictions that are actually ahead of the curve.

James the Thickheaded said...

Visi's on the mark. Let's not confuse a trade with a strategic move. Check with the Chinese on how well the diversification of their reserves into Euro's went.

Sophocles said...


I just ran across this and would like to hear your take. I ask in seriousness as I am in the process of buying out my brothers' share of our restaurant. I am in the midst of the loan process but have not actually signed the papers yet.

I would greatly appreciate your insight.

Thank you.

The Anti-Gnostic said...

Focus on the micro, not the macro. People will always pay for prepared food; there are restaurants even in poor neighborhoods.

You just need to make sure you can profitably supply what their discretionary income allows them to pay for.

Sophocles said...

Still, what about the claims of this article? I'm curious.

Visibilium said...

It's histrionic bullshit.

Congratulations on your buyout. The fact that you have access to lending during this tight environment tells me that you have great relationships and a great balance sheet. Obviously, you're doing something right, and I won't talk about pricing, costing, demographics, and the other things that you're already good at. You shouldn't waste your time reading doomsday buffoons.

Sophocles said...


Thanks for the good word and for your kind words. Yes, it has been a battle to get to this point for me in the face of opposition that must be part of any attempt to consistently put out a good product with care and the desire to also serve God in our work.

For those interested, this is the link to my restaurant:

If you click on "Media", you can see me in the videos doing my "spiel".

On the main web page itself, down on the bottom right corner where it says "WISDOM OF THE SAINTS", if you put your cursor over this it displays a different saying with each log on.

This is an extension of a card with such sayings we give out with each and every order.

Visibilium said...

Very impressive.