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quote:

Originally posted by Shakka Yes, theoretically, though it's currently more beneficial to them not to do so. They have a near monopoly in "cheap" labor as long as they peg the dollar. Particularly a weak dollar. But I'd guess that over a 5-15 year horizon, that would probably make a good bit of sense.

Yeah, but as their economy keeps expanding it will cost them more and more to peg the dollar, as far as my understanding goes it will come to one point when it is simply no longer sustainable to keep pegging the dollar (esp with the current defecits of the US government and the trade defecits).

There have already been statements by central reserve banks that they are diversifying their holdings away from holding US dollars. Those are their public statements. None wants to be the first to admit they are ditching their large dollar holdings because a mass sell off of dollars will hurt them. So I suspect that they will secretly be trying to drastically reduce their dollar holdings in the hope that no other central banks are doing the same. The classic prisoners dilemma.

In the past the Chinese and Japanese Central bank have been buying dollar denominated assets which funds the US deficit and keeps their own currencies down thus promoting their exports, this trend is untenable. The Chinese and Japanese have a vested interest in maintaining the status quo because of the serious economic problems in their own countries plus a serious collapse in the US dollar will mean they will lose hundreds of billions of dollars on the value of their US assets. What they would like to see is an orderly decline in the value of the dollar. Unfortunately the status quo is not really an option. The US economy is running on fumes. In the long run it will be the US economy which is the biggest loser in globalization.Interest rates are going up, asset prices are WAY overvalued, US production and labour is uncompetitive and their is a limit to the amount of credit that can be given to a country that has borrowed to the limit.

Even Warren Buffet has said that the trade/budget deficits are a serious issue and he joked that he is now holding foreign currency. So all the talk on the markets is of how much the US dollar will fall. Which is what I imagine a lot of smart money is counting on, a precipitous fall in the US dollar will be a major economic disaster BUT it would improve US economic competitiveness and would make US assets attractive again.

In this sort of market for US assets, the currency is absolutely ripe for speculative attack. Which means that it would be prudent to diversify into a non US currency, ideally one that produces raw material or an exporting country

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