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Can the "Axis of Oil" Topple the US Dollar?By Gary Dorsch Were it not for its "reserve currency" status, slowly turning into a post-World War II relic, the US dollar would have already collapsed by now. A string of $4.4 trillion of US trade deficits since 1996, and a heavy reliance on foreign money to fund its external imbalance, has severely weakened America's global economic leadership over the past five years. The US dollar survives, due to America's political stability, its military might in the Persian Gulf, its large $12.5 trillion economy (28% of global GDP), and deep and liquid financial markets for bonds and stocks. Last week, the US dollar fell to an all-time low against the Euro, a new milestone in a steep decline that began more than six years ago. The Euro hit a record high of $1.3682 on April 27th, up from $1.20 a year ago and as little as 83 cents in October 2000, when the rally against the dollar began. The British pound is hovering near $2 area, and the Australian dollar fetches 82.50 US-cents, both at 15-year highs.  Since the beginning of the year, 50 of the world's currencies have risen against the dollar while only eight have declined. Behind the falling US dollar is a changing global economy. China and the US are the locomotives in the global economy, accounting for 60% of all the global growth in the last five years. But now, the $12.5 trillion US economy is sputtering, due to a slumping housing sector, while the $2.5 trillion Chinese economy is overheating, expanding at a blistering 11.1% pace in Q'1 India's elephant, China's dragon, and other dynamic economies, such as Russia and South Korea are expected to contribute more than 50% to world economic growth in 2007, with China's contribution alone being 30% and India's 10%. In comparison, the US contribution to world growth is expected to fall to 12%, after its economic output halved to 1.3% in Q'1, the smallest gain in four years. Every time US year-on-year GDP growth has dipped below 2% since 1960, a full-blown recession unfolded. In contrast, the Euro zone economy is expanding at a 2.6% clip, its best performance in six years, and the European Central Bank is aiming to lift its interest rate in June, thus making the US dollar less attractive next to the Euro. As such, many foreign central banks have been reducing their exposure from the US dollar to the Euro and British pound over the past year. US Dollar Slides despite Improvement in Foreign Trade Since the bursting of the dot-com investment boom on Wall Street in 2001, the US Dollar Index has been sliding on a slippery slope, weakened by rising US trade and budget deficits, and an increasingly unpopular war in Iraq, which is costing the US Treasury about $2 billion per week. The US Dollar Index has a weighting of 57.6% in Euros, 13.6% in Japanese yen, 12% in British pounds, 9% in Canadian dollars, 4.2% in Swedish kronas, and 3.6% in Swiss francs.  The weaker dollar is beginning to translate into an improved US trade balance for the first time in six years. The US trade deficit is February was $59.4 billion, compared with a record high of $69.6 billion in July 2006. In February, the US posted a surplus with Britain for the first time since 2001. For the first two months of 2007, the deficit with the European Union was less than $13 billion, down 28% from a year earlier. With Canada, the deficit fell to below $12 billion from more than $16 billion. Still, the US deficit with China soared to a record high of $232.5 billion dollars in 2006, up from $201.5 billion the year before, to account for nearly one-third of the total. The annual US deficit with Japan also hit a new high at $88.4 billion, up 7.2% from 2005, thanks to Tokyo's weak yen policy. Beijing and Tokyo have achieved such spectacular results by manipulating their currencies against the US dollar. Japanese Financial Warlords Buck the Trend The giant US trade deficit of $763 billion in 2006 produced a huge outflow of dollars to other countries. The People's Bank of China, the Bank of Japan, and Arab Oil kingdoms have been the key linchpins in limiting the US dollar's losses by buying US Treasury debt. Foreign central banks boosted their holdings of US Treasury and agency debt by $14.2 billion in the week ended April 25th, to a record $1.93 trillion. Although the US dollar is sliding to multi-year lows against most major currencies, the greenback is up 5% against the Japanese yen from a year ago. The Bank of Japan is the largest holder of US Treasures with $618 billion, and pursues a radical monetary policy, pegging its overnight loan rate at only half-percent, or 475 basis points below the US fed funds rate, in order to prop-up the US dollar.  "Most countries are diversifying their investments to non-US dollar assets. But in the case of Japan, we are still cautious about shifting from the dollar to other currencies," said Hiroshi Watanabe, Japan's powerful FX chief in Abu Dhabi, on April 19th "If we do that, it goes towards the depreciation of the dollar. So why should we trigger such a stupid action?" Watanabe asked. The Bank of Japan is the world's largest "yen carry" trader. Last fiscal year, Tokyo paid 7.6 billion yen in interest expense, while earning 3 trillion yen in interest rate income on US Treasuries. "Thus, we don't have any plans to sell foreign currencies to redeem government bonds," said Japanese finance minister Koji Omi on March 23rd. The US Treasury is thrilled with Japan's "cheap yen" policy, which encourages the flow of capital from Tokyo to US financial markets. Tokyo also reaps big rewards, as yen has fallen 14% in the past year against the Euro, 5% against the dollar and 9% against China's yuan. That's boosted Japan's trade surplus by 74% to a record 1.63 trillion yen ($14 billion) in March from a year earlier. China overtook the US as Japan's largest trade partner in the year ended March 31st. Arab Oil Kingdoms Recycle Petrodollars into US$ Washington's allies in the Arab world, particularly in the Persian Gulf, are now worried about the influence of Shi'ite Iran in Iraq and elsewhere in the predominantly Sunni Muslim region. The US accuses Tehran of seeking to set up a covert nuclear weapons program, a fear shared by Saudi Arabia, the world's biggest oil exporter. Riyadh fears that US troops will leave Iraq prematurely, and enable Iran to consolidate its influence and leaving Sunni Arabs at the mercy of Shi'ite militias. The Arab Oil kingdoms are supporting the US war effort in Iraq by recycling much of their petrodollar surpluses into US Treasuries. But nearly four years into the Iraq war, America's patience with the war is growing thin. Democrats voted for a $124 billion funding bill for Afghanistan and Iraq for the current fiscal year, but with strings attached, ordering US troops to begin withdrawing from Iraq by October 1st.  The Arab Oil kingdoms are willing to recycle petrodollars into US Treasuries, but also want to be compensated for a weaker dollar with higher oil prices. The OPEC-10 cartel has lowered its daily oil output by 1.8 million barrels since November 2005, and with the depletion of 500,000 bpd from Mexico's giant Cantarell oil field last year, OPEC is back in the driver's seat. OPEC has guided the benchmark North Sea Brent price upward to $68 /barrel, from as low as $51 /bl in January. To read the rest of this article, click on the hyperlink below: http://www.sirchartsalot.com/article.php?id=58 Gary Dorsch 321gold Ltd |
