Even though this blog and some others have warned of the vulnerabilty of the greenback to erosion of its reserve currency status, many have dismissed that idea as if it were a lunatic fringe view. Yet pound sterling was once the reserve currency and is no more.
Now Pimco has joined the camp of seeing the dollar as waning, and sees emerging economies as the place to be.
From Bloomberg:
Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.
The dollar will drop the most against emerging-market counterparts, Curtis A. Mewbourne, a Pimco portfolio manager, wrote in a report on the company’s Web site. The greenback is losing its status as the world’s reserve currency, he said.
“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his August Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote…
“We are positive on the Asian currencies against the dollar and think they will continue to rally,” de Mello said in an interview. “I do think the diversification of reserves is something that’s important and I think we’ll see some from China into other currencies and this will benefit as well Asian currencies and other emerging currencies.”
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Moral of the story:
Got Gold?
All the more reason to consider Prechter's premise the dollar has bottomed. Richard Russell has long held the scramble to pay dollar-denominated debts worldwide amounts to a "synthetic put against the dollar".
Just what if….China's rolls their LT Treasuries into commodities, and restructures the rest with increasingly shorter maturities? They are after all, extremely pissed at Wall St's financial chicanery.
the dollar can lose its reserve currency status only after a war. be realistic: the u.s. is content on exporting paper for goods from the asian mercantilists. the e.u. has no desire to print paper so others can park their savings and bid up prices of everything on the continent.
who really needs a reserve currency? the mercantilist savers. do they have a say? they are in a stalemate with their present huge dollar accumulation.
what is about to change? nothing.
…many have dismissed that idea as if it were a lunatic fringe view.
This is due to the current political and military hegemony of the US, and it is hard to see that changing anytime soon, hence the assumption that for the time being and for the forseeable future there is a floor under the dollar and its status as 'reserve currency' is safe.
the dollar can lose its reserve currency status only after a war.
Barring something catastrophic.
Pimco is cute. They are just like the buy side in that they always talk their book. They want to close their short dollar positions, and getting the public to sell dollars is the easiest way for them to do it.
It seems to me that we're in uncharted waters here. Britain lost its reserve status, but was it because of two wars or because it went off the gold standard (just before WWI) and was unable to get back onto it (tried and failed in the 1920s)? Or maybe the loss of colonies meant that the cash cows (and cheap soldiers) had fled the barn.
We suppose that the dollar's fall from its pedestal will have to be cataclysmic, but who knows? It could simply decline as a % of reserve holdings (even today, sterling is still a minor component of global reserves) over a long period.
This would be the sort of managed devaluation that constitutes the Fed's best-case scenario. Major dollar creditors would have every incentive to go along, as it would allow for an orderly adjustment of current imbalances, re-tooling of export industries, etc.
I hope that it goes this way. An overvalued dollar means that it is easy for America to consume, but hard for it to be competitive in tradeable goods.
The effect of a shock, on the other hand, could go either way. We all hear about Chinese dollar dumping, but what about a world event that would entail a flight to the dollar?
Just because imbalances exist doesn't mean that they won't get worse in the near term.
What's odd is that PIMCO and WEB are saying hold on to that gov't spending that benefits (even if some are too stupid to realize it) when they were more than happy to have the gov't run up trillions to support their investments.
Aside from that, if the USD declines, that's fine but I would expect it has far more to do with our trade deficit as opposed to this spending. Japan has Debt/GDP over 150% and the Yen has been stubbornly expensive relative to where Japan would want it. USD may decline over time but that would benefit our manufacturing segment and help force us to right our trade deficit so I'm not sure why people are so scared/concerned.
America surpassed Britain economically for almost a generation prior to the pound losing its' dominant status.
Suspect that dollar hegemony will follow the same path,
I think PIMCO might be talking up its book.
My sense is that PIMCO is talking its book. That in itself is a suggestion that one might want to pay attention. I believe that the the dollar could very well no longer be acceptable as a reserve currency. As to Sterling's being eclipsed by the Dollar, that event took place in an environment where is was perceived in the market that Britain was insolvent.
Each of the succesive Treasury financings over the coming year will tell us where we are headed. In that observation be wary of the Fed buying new issue in days and weeks subsequent to the initial sale.
I believe US$ became a settlement currency over time as USA emerged as the strongest economy after the WW2 and led the world in international trade. When a country exported to and at the same time imported from USA frequently and in large volume, it was convenient for the parties involved to conduct the transactions in US$. The exporters in that country then sold their US$ to the importers who needed US$ to pay for their imports. When a region did the same thing, US$ was bought and sold in the similar manner in that region – and eventually developed into EuroDollar and AsianDollar in the 70's. Because the US$ was traded in large volume in those regions, the spread of US$ between buy and sell became very thin, and that facilitated US$ to become the settlement currency among countries outside USA.
It is natural that a major settlement currency would eventually become a reserve currency, more by choice of the traders than by design of the country that issues the currency.
Of course, there are many other reasons for a currency to become a reserve currency.
The dollar bears need to answer one question that I suspect they will have a hard time answering:
If the US dollar is going to tank because it loses the reserve currency status, what is going to be the new reserve currency?
Think about it!
If you are making a macro bet, you better be sure that it is consistent. Where are all the future reserves going to go?
Nonsense, sell the news. The Pimco call means the dollar will strengthen. This is the dollar bottom (for now).
Making news and market manipulation is the only way to make money these days.
I thought YS was more critical than this. Pimco's public calls are often incorrect.
Like most others who commented here, I too don’t think the USD is under serious threat from another sovereign currency. The only possible threat may come from IMF’s SDR, but even that is unrealistic. Any thoughts about that?
Vinny G.
eh: "This is due to the current political and military hegemony of the US, and it is hard to see that changing anytime soon, hence the assumption that for the time being and for the forseeable future there is a floor under the dollar and its status as 'reserve currency' is safe." That has not been the case historically, and there is little reason to believe that this will be the case now.
As Anonymous Monetarist states above, US economic output passed the UK a generation before the currency regimes adjusted to that reality. This was true in the case of the UK passing the Dutch as well. The point to follow is that reserve currency status is reasonably closely linked to economic _production_ over the last 500 years. It was more closely linked to trade in the early part of that period since this was the sweet spot of commerce at that time when industrial/other production was lower overall and more difficult to monetize.
It is a mistake to assume that reserve currency status is driven by military standing. This is not the case; the linkage is much weaker. There was no point at which either the Dutch or the UK were the preeminent military powers of their time; they were always on the smaller side relative to Spain and France respectively. Powers with the reserve currency have been central to alliance networks, usually amongst mediums sized states with extensive commercial and substantive economic relations with each other. Reserve currency nations had to be able to defend their place in such trade flows, yes, so they require significant if not dominant military capacity. It is notable, and has been much analyzed, that the reserve currency states have been the most effective naval powers of their times. That remains true up to the present, though to my mind as a student of all of this I think this requirement is less relevant at the present. If some power decides to try to blockade other countries to bully trade flows, then yes it will matter. I think the rest of the world can effectively bankrupt us if we try, so I don't see that as a high probability. With a nutjob like McCain as Prez, all such bets are off, but we didn't get that. Follow the bouncing warhead on that issue, though.
The key issue in this, then, is, "Has the US lost sufficient industrial capacity relative to another or several other closely linked states to the degree that a shift in the reserve currency is probable?" Europe certainly could take the reserve status back if they decided to act as a state. Most in the commentariat think that unlikely. I'm far less sanguine on that score, but no it does not appear an imminent outcome. We are left than with any some putative BRIC Bloc. They aren't there yet, but the potential is very real.
What I do _not_ see probable is any substantive recovery of the US economically in the next twenty years relative to others around the world. The politics seem impossible, and there are other constraints. This issue will be largerly determined in my view, then, by how much others integrate their political standing and what they choose to do with it. Our fate, in short, is in the hands of others. We may be glad (or not) that they haven't a clue what they are going to do—but that has also been the historical norm. Changes in the reserve currency were never 'planned': they 'happened.' And the next one will most likely follow that imago as well.
But military standing will have precious little to do with it. And this is what makes our decision in the US over the last generation firm up an imperial policy rather than an industrial policy so self-injurious. But that is very much what previous holders of the reserve status did as well, we are only following precedent. Don't believe, then, in 'the reasons' for these imperial military ventures. For all practical purposes, those reasons are utilitarian fantasies.
As a Canadian, I live outside the fishbowl that is US culture. What I observe over and over again is that any discussion of a possible negative future for the US (in any way at all) is responded to with mountains of crushing social pressure. If you take time to notice, opinions are used in place of real data. Attacks on the messenger appear almost instantly. Those who refer to history as a basis for learning are scorned as having an incorrect understanding of history. Political systems are often confused with economic systems. And the basics are many times ignored altogether.
So many responders quickly reject that the US dollar could be in trouble. Consider some recent history. When I think back a decade or two, I remember many years of news articles from the US containing the word 'millions'. Not very long ago we started to hear the word 'billions'. Before I was even accustomed to hearing 'billions', suddenly 'trillions' appeared.
By definition, the more dollars you create, the less each one is worth. The US dollar is, in my opinion, overvalued relative to most other major currencies. But holding the position of reserve currency is a very complicated situation and many factors are involved. I do not believe the US Dollar need ever be replaced as the world's reserve currency, but a sizeable relative devaluation is now overdue. Fundamentals can only be ignored for so long.