U.S. Dollar Takes Another Hit

[Goaticus]

http://www.nypost.com/p/news/business/item_hFyfwvpBW1YYLykSJwTTEL

Ben Bernanke's dollar crisis went into a wider mode yesterday as the greenback was shockingly upstaged by the euro and yen, both of which can lay claim to the world title as the currency favored by central banks as their reserve currency.

Over the last three months, banks put 63 percent of their new cash into euros and yen -- not the greenbacks -- a nearly complete reversal of the dollar's onetime dominance for reserves, according to Barclays Capital. The dollar's share of new cash in the central banks was down to 37 percent -- compared with two-thirds a decade ago.
Fed boss Ben Bernanke may be forced to raise rates in order to restore faith in the dollar — and help bring the euro and the yen back to earth.

Fed boss Ben Bernanke may be forced to raise rates in order to restore faith in the dollar — and help bring the euro and the yen back to earth.

Currently, dollars account for about 62 percent of the currency reserve at central banks -- the lowest on record, said the International Monetary Fund.

Bernanke could go down in economic history as the man who killed the greenback on the operating table.

After printing up trillions of new dollars and new bonds to stimulate the US economy, the Federal Reserve chief is now boxed into a corner battling two separate monsters that could devour the economy -- ravenous inflation on one hand, and a perilous recession on the other.

"He's in a crisis worse than the meltdown ever was," said Peter Schiff, president of Euro Pacific Capital. "I fear that he could be the Fed chairman who brought down the whole thing."

Investors and central banks are snubbing dollars because the greenback is kept too weak by zero interest rates and a flood of greenbacks in the global economy.

They grumble that they've loaned the US record amounts to cover its mounting debt, but are getting paid back by a currency that's worth 10 percent less in the past three months alone. In a decade, it's down nearly one-third.

Yesterday, the dollar had a mixed performance, falling slightly against the British pound to $1.5801 from $1.5846 Friday, but rising against the euro to $1.4779 from $1.4709 and against the yen to 89.85 yen from 89.78.

Economists believe the market rebellion against the dollar will spread until Bernanke starts raising interest rates from around zero to the high single digits, and pulls back the flood of currency spewed from US printing presses.

"That's a cure, but it's also going to stifle any US economic growth," said Schiff. "The economy is addicted to the cheap interest and liquidity."

Economists warn that a jump in rates will clobber stocks and cripple the already stalled housing market.

"Bernanke's other choice is to keep rates at zero, print even more money and sell more debt, but we'll see triple-digit inflation that could collapse the economy as we know it.

"The stimulus is what's toxic -- we're poisoning ourselves and the global economy with it."

[MrBogosity]

"Economists warn that a jump in rates will clobber stocks and cripple the already stalled housing market."

Yes, because people just HATE lending money at a higher interest rate...

[evensgrey]

"Economists warn that a jump in rates will clobber stocks and cripple the already stalled housing market."

Yes, because people just HATE lending money at a higher interest rate...

That's not the problem, everyone is expecting to be able to BORROW at idiotically low interest rates.  That won't last long once rates go up, but there'll be a bit of a hiccup.

[Virgil0211]

"Economists warn that a jump in rates will clobber stocks and cripple the already stalled housing market."

Yes, because people just HATE lending money at a higher interest rate...

They could always, you know, compensate for this by helping companies with that other fundraising method they tend to use. What was that, again? Oh, right! Equity! Let's reduce or eliminate the capital gains tax and reduce other potential barriers to stock market investment! After all, companies don't seem to be too keen on accumulating more debt at this time. Companies could have an easier time expanding, pay down their debt, and Bernanke could start raising interest rates without fearing such a significant backlash in the economy.

Then again, that would be the sensible solution. =P

[MrBogosity]

That's not the problem, everyone is expecting to be able to BORROW at idiotically low interest rates.  That won't last long once rates go up, but there'll be a bit of a hiccup.

How are they going to be able to borrow, though, with negative real interest rates where no one in their right mind would lend it to them?

[Virgil0211]

How are they going to be able to borrow, though, with negative real interest rates where no one in their right mind would lend it to them?

Private companies themselves are also pretty heavily indebted. The debt to equity ratio is still elevated from pre-crisis borrowing. I doubt they'd reach for more debt until their balance sheets were a bit healthier.

[Goaticus]

What's funny is that even today most people pretend that we can never lose our reserve currency status.

[Ibrahim90]

with that moron as head of the federal reserve, it's not going to last much longer.

of course, if he were to wisen up, the least he'd do is contract the amount of money or something--end the inflation either way. at most, end the use and reliance on this silly paper/computer money. it's absurd.

[Virgil0211]

with that moron as head of the federal reserve, it's not going to last much longer.

of course, if he were to wisen up, the least he'd do is contract the amount of money or something--end the inflation either way. at most, end the use and reliance on this silly paper/computer money. it's absurd.

I think it might be good for the US to start a program where they start purchasing various precious metals like gold, silver, platinum, etc. When they have enough to back the majority of dollars in circulation, tie the price of the dollar to a certain amount of gold, but allow it to be exchanged for an equivalent amount of other metals (say, if the dollar was tied to an ounce of gold, you could exchange the dollar for an amount of silver equivalent to the value of one ounce of gold). That'll keep the price stable while alleviating the fears of some people that a gold standard wouldn't adequately supply the currency in circulation.