Quite a few very well-informed people in the blogosphere are becoming concerned over the possibility of an impending collapse of the dollar. Brad DeLong has a graph and a lengthy quote from a Washington Post article. Mr. DeLong observes:
“The best answer I’ve come up with is that the dollar is above its fundamental value because most people who might place very large bets on a rapid decline in the dollar thinks such bets are still too risky, but the risk associated with them is falling every day, and someday…”
Dan Drezner is worried, too:
“The big question that watchers of global finance have been asking in recent years is: what happens when the Asian central banks stop buying dollars?”
This is something that has concerned me for quite a while as well. We should remember that the Chinese are our trading partners but neither our friends nor our allies. How dependent should we be on their willingness to buy dollars to support our spending habit? And the Chinese have problems of their own.
And, of course, from the point-of-view of the Chinese they’re just doing what the IMF has been asking them to do:
BEIJING: China’s central bank said the country will further reforms to “create a more flexible exchange-rate mechanism,” responding to an International Monetary Fund (IMF) recommendation that the yuan’s peg should be relaxed.
“We will take measures in various ways to further this reform, in a gradual and steady manner,”’ the People’s Bank of China said in a statement on its website. Last Friday the IMF released a 72-page report, which said a more flexible exchange rate would help China’s government achieve its goal of a gradual economic slowdown.
China buys dollars to ensure the yuan stays at about 8.3 per US dollar and the government is concerned that a loosening of its nine-year-old currency peg might trigger capital inflows, hampering state efforts to cool the economy, according to the IMF report. Inflows would force the government to issue more yuan, boosting money supply. – Bloomberg
And, for those of you who are conspiracy theorists, it’s certainly an interesting coincidence that fluctuations in the dollar should follow hard on the heels of the defeat of John Kerry on Tuesday. Remember that John Kerry (and more specifically Kerry-supporting 527’s) received enormous financial support from George Soros, the world’s largest currency speculator. So, which came first, the opportunity for currency speculation or the support for Kerry?
