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Home Opinion Opinion Dropping the US dollar
Dropping the US dollar PDF Print E-mail
Written by Gary Howes   
Tuesday, 06 October 2009 09:36
The Conservative party's solution to the growing budget imbalance is to raise the retirement age to 66.


Big-bonus bankers are not particularly worried by the proposal. Firemen are. The Independent reports that there is a secret agreement (well it was secret until this morning) between "Gulf Arabs, China, Russia, Japan and France... to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council."

The Icelandic krona is not particularly worried by the proposal.

The US dollar is.

Leaving aside the viability of the unified GCC currency - Oman and the Emirates have made clear they don't want to play - the story has a ring of truth about it.

Russia and China have both been vocal in their call to end the hegemony of the greenback in international trade. The single GCC currency, if and when it happens, would be more likely to use a currency basket than a direct dollar peg. With the possibility of intervention now back in its arsenal Japan will clearly do what it feels necessary to protect its deflationary economy from an over-strong currency. France, of course, would take any opportunity to give Washington one in the eye.

In that light it is no surprise that the dollar has taken a bit of a beating since the news broke. It has lost one euro cent and half a yen overnight, adding to the losses it had already made on Monday in the absence of any helpful comment from G7.

The US data did the dollar no damage. There was only one figure; the services sector purchasing managers' index (PMI) which rose by a point and a half into the growth zone at 50.9. Unfortunately, everybody else's services PMI went up as well. The US number came equal last with the Euroland result. Britain topped the rankings at 55.3 while Germany and France in the peloton were close to 52 and 53.

With the assistance of The Independent, the euro and the yen had a good day while the sterling was left behind. Sterling is a touch firmer compared with Monday morning but, having no stake in the mooted oil currency basket, sterling shared the fate of the dollar. It has lost ground to the euro and the yen for obvious reasons and is softer across the board despite the good showing by the services PMI.

The currency that has done best of all in the last 24 hours is the Australian dollar. Analysts had expected the Reserve Bank of Australia to hint at a forthcoming interest rate increase after this morning's board meeting. Most were not prepared for a rate hike today but that is what they got. The RBA raised its cash rate by 25 basis points to 3.25% from its previous record low.

Even though investors were primed for an eventual rise the move was enough to send the Aussie 1% higher almost immediately. Having managed to avoid recession entirely, the RBA feels it is necessary to begin taking interest rates back up to "normal" levels. Local economists now look for another 25 basis points of tightening before the end of the year and a sustainable 5% cash rate "in a year or two".

The remainder of today's ecostats will probably take a back seat as investors digest the RBA rate hike and the death-of-the-dollar story. Neither Swiss inflation nor Canadian building permits should get in the way.

As for sterling, it will be the figures for industrial and manufacturing production that decide its fate. Analysts are not optimistic, predicting monthly increases of +0.3% for manufacturing and +0.2% for industry as a whole. A negative number would be bad for the sterling.


Last Updated ( Tuesday, 06 October 2009 09:39 )
 

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