Is This A Dollar Crisis?

November 7, 2007 at 7:41 am  ·  Category: Foreign Exchange, Gold, Market Commentary

We’re in the midst of a dollar crisis here and the market is reflecting on the high cost of oil and the falling dollar and soaring gold prices.  The good economic news is going to be overshadowed by the dollar crisis we’re now in.”

Peter Cardillo, Chief Market Strategist, Avalon Partners

There is concern about the dollar potentially losing its status as the global reserve currency, although we’re still a long way from that.”

Dustin Reid (subscription required), Foreign Exchange Strategist, ABN Amro

Last night (today in China), vice chairman of the standing committee of the National People’s Congress (China’s Parliament), Cheng Siwei, told a financial forum:

“In terms of the structure of our foreign exchange reserves, we should take advantage of the appreciation of strong currencies to offset the depreciation of weak currencies.

For example, in the current foreign reserves structure, I mean the bonds we bought, the euro is appreciating against the yuan while the US dollar is depreciating against the yuanSo we should make a balance between the two.”

China holds $1.43 billion in foreign exchange reserve, according to Reuters, so any shift from dollars to euros would have a huge impact on currency markets.

Based on this 1 Day $/Euro chart it appears news of Siwei’s comments broke about 6:15pm PST which is 9:15am the next day in Shanghai.

The euro is up about 1.3 cents versus the dollar since then.

December Gold has shot up almost $16 to around $840.

US stock markets have sold off at the open with the Dow down about 115 points, the S&P 14 and the Nasdaq 26.

UPDATE (Wed 11/7, 7:00am PST): 5 years ago a lone analyst predicted everything we’re seeing right now.  Not just a drop in the dollar but the exact cause: a diversification away from the dollar by Asian central banks.  His name is Richard Duncan and his book, revised in 2005, is “The Dollar Crisis”.  Everybody should read it.

UPDATE (Wed 11/7, 8:30am PST): It’s worth pointing out that the Chinese officials whose comments are roiling currency markets today is a politician with no control over monetary policy.  Apparently, he’s been known to saber rattle and shake up markets in the past.

See David Gaffen’s “Who Is Cheng Siwei and Why Should We Care?”

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