Dollar’s Prestige Falls

Since the current global recession began in 2008 the US dollar has not only fallen in value but has also suffered a decline in prestige. Many nations are seriously discussing replacing the US dollar as a reserve currency. While the dollar declines against most major currencies China and other nations with emerging economies are calling for an end to the greenback’s dominance in global trade. Venezuelan President Hugo Chavez, no friend of the United States, stated Saturday that Venezuela, Russia and Iran have proposed replacing the dollar as the currency used for the oil business. Chavez stated, “We’ve been talking about this in OPEC. Venezuela agrees and there are other countries, such as Iran and Russia that have also proposed this idea.”

China’s Currency Undervalued

China has joined other nations and is proposing replacing the US dollar with a basket of currencies. Many Middle East nations involved in the oil trade support the idea. Instituting a new reserve currency would pose economic, diplomatic and economic challenges which would likely take years to resolve. China has undervalued their currency since 1995 making their products cheap in the US but at the same time putting US products out of the reach of Chinese consumers.

Concerns About US Debt

China enjoys a huge trade surplus with the US that creates growth and millions of jobs in China. Unfortunately that same trade surplus creates huge deficits and unemployment in the US. Massive US deficits caused by the financial meltdown and the bailouts have put downward pressure on the dollar in currency markets. Chinese officials have expressed concerns about rising US debt.

S American Nations Call For Dollar to be Replaced

At a meeting of Bolivarian Alternative for the Americas (ALBA) participating nations announced plans to create a single currency which would replace the US dollar. Participating nations include Bolivia, Cuba, Ecuador, Nicaragua, and Venezuela. A Russian delegation also attended the meeting. Russia has been in the forefront of the move to replace the US dollar as a global reserve currency. At the present time the role of the US dollar as a reserve currency seems relatively secure but the growing movement to replace the dollar leaves the currency’s future in doubt.

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Investors Seek Hard Assets

The US dollar is falling victim to already massive deficits which are increasing at a rapid pace. Investors are seeking hard assets such as commodities and this has benefited commodity based currencies such as the Canadian and Aussie dollars. Rising risk appetite and concerns about the US dollar’s status as a reserve currency are all putting downward pressure on the green back. Nobel laureate Edmund Phelps stated, “The dollar had been strong because the U.S. was a haven in the storm, and now that the storm is abating, who needs the dollar? People got exasperated with the tiny returns on safe assets.”

Gold at Record Highs

The Canadian dollar has gained 2.5 % on the greenback during the past five days. Canada benefited from a rise in crude oil prices and gold hit a record $1,066.40 per ounce. Growth and commodity linked currencies have been consistently outperforming the US dollar in currency markets. The euro almost hit last month’s one year high of $1.4842. Jane Foley of Froex.com stated, “The euro took a tumble on the back of a much weaker than expected German ZEW survey, though buyers quickly emerged lifting the euro back above the $1.4800 level.” Against the pound the euro traded at 93.95 pence.

Wednesday’s Fed Report

Investors and currency experts are waiting for Wednesday’s release of the minutes of September’s Federal Reserve policy meeting. Investors will be looking for indications of a tightening of monetary policy and withdrawal of stimulus programs. Improving earnings are expected to keep investors seeking riskier assets and commodity based currencies keeping downward pressure on the US dollar. Michael Klawitter of Commerzbank stated, “Risk perception remains an important topic in the absence of a cyclical trend out of the United States. But I wouldn’t expect any serious impact on the risk perception picture when liquidity remains very ample, so in this environment commodity currencies should continue to outperform.”

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Fed to Change Policies as Recovery Takes Place

The US dollar pulled back from a 14 month low on Friday after remarks by Federal Reserve Chairman Ben Bernanke who said that the Fed will tighten monetary policies when recovery is apparent. The Canadian dollar rose as data showed that Canada added sic times as many jobs than expected in September and a huge fall in unemployment throughout Canada. The greenback also pulled back from a two week low against the euro and also gained on the Japanese yen.

Low Rates and Quantitative Easing Dollar Negative

Bernanke also said that the Fed must continue to stimulate the economy but also said that the Fed cannot do so indefinitely due to inflation fears. Low interest rates and quantitative easing have put downward pressure on the dollar during the current recession. Vassili Serebriakov of Wells Fargo stated, “The mere fact that Bernanke mentioned tightening in his speech, especially given the fact it’s towards the end of the week, provided some excuses to take profits on short dollar positions. The market has been running with the idea that the Fed is going to be on hold for a very long period of time, probably longer than a lot of other major central banks.”

DXY Gains

On Friday the ICE Futures U.S. dollar index (DXY) rose 0.4% to 76.251 after hitting a 14 month low of 75.767 on Thursday. Some currency experts said that Bernanke was only stating the obvious and believe the Fed’s next move will be a rate increase in the third quarter. The Canadian dollar hit a one year high after Canadian data showed job gains of 30,600 in September. Earlier predictions had pegged job gains at 5,000 and the news was a pleasant surprise for Canadians. The US dollar fell 0.5% vs. the Canadian dollar and traded at C$1.0464 after falling as low as C$1.0426.

Dollar Gains on Yen

The dollar vs. euro gained 0.3% and the euro traded at $1.4750. The dollar also gained against the Japanese yen posting a 1.2% gain at 89.47 JPY.

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