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America’s acupuncture points: Attack on the dollar

Victor N Corpus, Asia Times
One of the pillars propping up US superpower status and worldwide economic dominance is the dollar being accepted as the predominant reserve currency. Central banks of various countries have to stock up dollar reserves because they can only buy their oil requirements and other major commodities in US dollars.

This US economic strength, however, is a double-edged sword and can turn out to be America’s economic Achilles’ heel. A run of the US dollar, for instance, which would cause a dollar free-fall, can bring the entire US economy toppling down.

What is frightening for the US is the fact that China, Russia and Iran possess the power to cause a run on the US dollar and force its collapse.

China is now the biggest holder of foreign exchange reserves in the world, accumulating $941 billion as of June 30 and expected to exceed a trillion dollars by the end of 2006 – a first in world history. A decision by China to shift a major portion of its reserve to the euro or the yen or gold could trigger other central banks to follow suit. Nobody would want to be left behind holding a bagfull of dollars rapidly turning worthless. The herd psychology would be very difficult to control in this case because national economic survival would be at stake.
(19 Oct 2006)
From a longer article, AMERICA’S ACUPUNCTURE POINTS, PART 1: Striking the US where it hurts.

Also see this USA Today article, mentioned by Corpus, What’s the real federal deficit? How many billions (or trillions) of dollars depends on how you do the accounting.

Crisis of the U.S. Dollar System

F. William Engdahl,
It’s accepted wisdom that the United States, despite recent problems, is still the strongest growth locomotive for the world economy, the pillar of the global system. What if we were to discover that, instead of being the pillar, that the United States was, in fact, the heart of a dysfunctional economic system, which is spreading instability, unemployment, and depression globally?

No other nation on earth comes near to the commanding US military superiority in smart bombs, military IT, or in sheer force capabilities. The US position in the world since 1945, and especially since 1971, has rested on two pillars, however: The superiority of the US military over all, and, the role of the dollar as world reserve currency. That dollar is the Achilles heel of American hegemony today.

In my view, the world has entered a new, highly dangerous phase since the collapse of the US stock market bubble in 2001. I am speaking about the unsustainable basis of the very Dollar System itself. What is that Dollar System?
(14 Oct 2006)
Based on a presentation from 2003.

How does the US Dollar Defy the Law of Gravity?

Gary Dorsch, Global Money Trends
Trading in foreign exchange is akin to judging a reverse beauty contest. The trick is to buy the “least ugly” currency at the right time. Nearly every central bank is engaging in some sort of manipulation of its currency, from outright intervention in the marketplace, such as in Brazil and China, to pumping up the money supply to inflate local stock markets, such as in Australia, China, England, the Euro zone, and India. Other central banks engage in “verbal jawboning” to keep traders in check.

Central banks are key players in the $2 trillion-a-day currency market, and traders are always on the lookout for signals that central banks are diversifying their FX reserves away from the US dollar. Global central bank reserves have more than doubled to $4.9 trillion in just three years, with particular focus on the massive US dollar stockpiles built up by Asian central banks, which could be switched into other currencies such as the Euro, Japanese yen, British pound, or Gold.

The US dollar accounted for 66% of foreign currency reserves held by global central banks in 2005, with 25% stashed in the Euro, 5% in the British pound, and 4% in the Japanese yen. In London, the world’s largest FX market, the Euro accounts for 35% of its average daily trading volume of $942 billion. Traders often look to the Euro, yen, and pound to gauge the mood of the global currency markets.

For the past six months, the Euro, Japanese yen, and British pound have been remarkably stable against the US dollar, locked into a 4% to 5% trading ranges. So the big question is: How did the big-4 central banks and their finance officials pull off such remarkable currency stability, at a time of enormous global trade imbalances, and 10% to 25% swings in global commodity and stock markets?
(23 Oct 2006)
Long technical analysis

Dollar Falls as Russian Central Bank Will Boost Yen Reserves

Daniel Kruger and Min Zeng, Bloomberg
The dollar fell the most against the yen in two weeks after Russia’s central bank said it was adding the Japanese currency to its foreign-exchange reserves.

Traders sold the U.S. currency after Alexei Ulyukayev, the Russian central bank’s first deputy chairman, told Interfax he may boost holdings from almost zero percent. Russia’s reserves, the world’s third largest, have swelled about 50 percent this year to $267.9 billion as oil prices surged. The U.S. currency rose to the highest against the yen this year on Oct. 13.

“The move could lead toward broader U.S. dollar weakness,” said Mark Meadows, a strategist at currency-trading company Tempus Consulting in Washington. With the dollar near key trading points of 120 yen and $1.2470 per euro “it brings up the question of whether the dollar is going to be able to sustain moves past these levels.”
(16 Oct 2006)

Australian treasurer seeks orderly $US withdrawal

John Garnaut, Sydney Morning Herald
TREASURER Peter Costello has called on East Asia’s central bankers to “telegraph” their intentions to diversify out of American investments and ensure an orderly adjustment.

Central banks in China, Japan, Taiwan, South Korea and Hong Kong have channelled immense foreign reserves into American government bonds, helping to prop up the US dollar and hold down American interest rates.

Mr Costello said “the strategy had changed” and Chinese central bankers were now looking for alternative investments.

“Of course you can have an orderly adjustment,” he told reporters. “And what I would recommend is that these matters be telegraphed well in advance. I think we should begin preparing ourselves for it.”
(22 Oct 2006)