Inflation

Dollar Diplomacy: Canada and Australia Pulling Ahead in Currency Contest

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The U.S. dollar losing out…to the Canadian and Australian dollar. From Fortune's web site:

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….

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."…

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….

…last week, the United Nations released a report concluding that the dollar should no longer be the world's reserve currency because it is not stable enough. The dollar is down 5% over the past month, and even currency traders don't see it as a safe haven any more…..Just last week, America's debt lept $166 billion in a single day. That one-day run-up is greater than the entire U.S. annual deficit in 2007.

See Reason magazine's October 2009 roundtable of economists and analysts on inflation expectations.

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  1. There’s that word “unexpected” again. Do journalists really not know the meaning of that word? (to paraphrase Emilio Montoya)

    1. You don’t get it. It has to be called unexpected, otherwise there would be no reason to write a NEWS article about it.

  2. So, if the USD were to stop being the world’s reserve currency, what would be the effects?

    1. Well, according to Wikipedia, “[a reserve currency] permits the issuing country to purchase the commodities at a marginally lower rate than other nations, which must exchange their currencies with each purchase and pay a transaction cost. For major currencies, this transaction cost is negligible with respect to the price of the commodity. It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.”

      So, in general, I suppose the effects for the US are bad.

    2. Higher interest rates on US debt is the main first order effect. Possibly leading to things like TEOTWAWKI or hyper-inflation or the US gummint having to scale back.

      1. …the US gummint having to scale back.

        HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA!

        You kill me, you really do…

        1. Dunno. Don’t underestimate how chagrined the American public would be at being bested at something by Canada.

    3. It would also mean that central banks wouldn’t hold much in the way of dollar reserves, and would dump those dollars back into circulation. Which is Not Helpful for inflation.

  3. Instead, she suggests they’re putting their faith in other dollars – the kind that come from Australia and Canada.

    The Chinese are cutting lots of bilateral trade deals denominated in yuan, which almost have to require that the central banks carry yuan reserves, so I wouldn’t count them out.

  4. Just last week, America’s debt lept $166 billion in a single day. That one-day run-up is greater than the entire U.S. annual deficit in 2007.

    No wonder my ass hurts.

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