Tuesday, October 13, 2009

Bloomberg: Central Banks’ Reserve Shift Ignores Dollar Data

central bank “Oct. 12 (Bloomberg) -- Central banks have been shifting their record reserves into the euro at the expense of the U.S. dollar..”

I’m a little worried. There’s a long term trend that the dollar is declining.

Many people have dismissed this with simple arguments like “The US Dollar is too important to go away” or “US Dollar is still the currency that everyone uses”.

One of the top ten rules in my invisible book of investing is that the past does not predict the future. It really wasn’t too long ago that the British Pound was the leading currency of the world. I’m not going to make a solid prediction on what will become the next leading currency, but my bet is on the Euro or the Chinese RMB.

The simple concept with currency exchange is that money inflows into a country increases the value of that country’s currency. Outflows decrease the value of a country’s currency. The biggest driver for money flows are differences in interest rates. So for example, if the US’s interest rate is at 0% and another country’s interest rate is at 3%, more so than not people will put their money into the other country. This is a bit of an overgeneralization, but the point here is that money is flowing out of the United States which has its federal funds rate set at near 0%. The result? A lower value for its currency.

I’m pretty worried. Even though Bernanke has recently said that the Fed will rein in its monetary stimulus and be on a lookout for inflation, I don’t think the market is believing it at all. The market is a little worried about inflation in the US dollar (which will decrease the real value of the dollar) and money outflows and the decline of the dollar from the US shows it.

Where are investors putting their money?

Anybody read about how gold hit record highs above $1000? That oil has hit levels above $70?

They’re putting their money into commodities. Is it a real rally?

I’ll explore this in a future blog post.


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