November 07, 2004

More Gloom 'n' Doom

WE REALIZE we haven't exactly been a Staunch Beacon of Sunlight as of late. Sadly, we shall have to add to that misery index today with some rather annoying news in the financial markets. Namely: there are rumors that China, and other foreign nations, are selling off their dollar-denominated assets.

The problem with that, as the Financial Times notes, is this:

India and Russia have reportedly been selling US assets, as well as petrodollar-rich Middle Eastern investors.

China, which has $515bn of reserves, was also said to be selling dollars and buying Asian currencies in readiness to switch the renminbi's dollar peg to a basket arrangement, something Chinese officials have increasingly hinted at. Any re-allocation could push the dollar sharply lower and Treasury yields markedly higher.

This would undoubtedly help exporters, but not for long. After all, a sharply weaker dollar would mean higher inflation and boost interest rates. The former, of course, makes the dollars everyone holds worth less; the latter curbs economic growth by making capital more expensive. Plus, it's just galling to have a really weak dollar: bad for the psyche and all that.

That said, we don't think it's time to party like it's 1979.

After all, these are just rumors, and once news breaks it has a way of reversing speculative trends. The little speculators, the ones just piling on, will get whipsawed; and the big speculators will walk away with some big profits in the meantime, provided they get out of their short positions fast enough. And it stands to reason that if one player is driving the market one way, his eventual volte-face will also drive it in the other.

Still -- it makes one think. Perhaps the dragon, for all its weaknesses, is a far quicker study and more powerful foe than we once thought.

Posted by Benjamin Kepple at November 7, 2004 09:58 PM | TrackBack