The message from last weeks G7 meeting is clear: the dollar is on a downhill slide. Thats what the finance ministers of the seven wealthy nations at that conference portrayed, if not in so many words.
Slowing of the U.S. economy this year has been drawing some attention in the media and from financial circles, despite some Wall Street pundits predictions for growth. Deficits, both trade and fiscal, are growing larger, and more and more pressure is falling on China to let its currency strengthen against the dollar, which will point up the weakness of the latter.
Reuters quoted David Gilmore, a partner with FX Analytics in Essex, Conn. You would have to be blind, deaf and dumb not to see that as pointing to a direction for the dollar, Gilmore said.
While the dollar has begun to decline, the housing bubble has burst, and peak oil is squeezing lower and middle levels of the U.S. economy. A slight drop in demand for gasoline is occurring because more Americans are beginning to restrict their driving to essential trips and even turning to other means of transport.
Following the G7 meeting, finance ministers and international bankers raised the pressure on China, the worlds fourth-largest economy, by twice citing it as one of the emerging economies with large current account surpluses that ought to have more flexibility in its currency. The officials said greater flexibility is needed to permit necessary appreciations.
That would seem to point up how unsustainable U.S. trade deficits are, according to some analysts. Last year, the deficit hit $723 billion, about 6 percent of gross domestic product (GNP).
Naomi Fink, a currency strategist with BNP Paribas in New York City, said: What might prompt some dollar fears is that the United States is closer to admitting the deficits are a big problem.
Pointing up we are riding on Chinese credit is the fact that Chinas central bank holds $875.1 billion in U.S. currency reserves, partially because Beijing regularly buys up dollars to suppress the value of the yuan.
Gilmore claims there is no sell signal for the dollar, but it is obvious that the dollars downturn will accelerate, and it is just a matter of time before the dollar crashes. The feds operating deficit for last year was $760 billion, or 238 percent more than the more widely-claimed deficit of $319 billion, according to The Washington Spectator newsletter.
That $760 billion figure was reported to Congress in mid-December and caused not even a slight ripplenot even a press release. Public debt has risen from $5.7 trillion when Bush took office to more than $8.4 trillion today.
At a conference on global imbalances the International Monetary Fund (IMF) sponsored, participants were told the U.S. economy is poised to slow along with consumer spending, and that will eventually pull the dollar down.
The dollar reached a seven-month low against an assortment of major currencies last week while financial markets trimmed their expectations that the Federal Reserve will boost interest rates past 5 percent.
Last week, the dollar slipped against the euro after the Russian finance minister challenged the dominant reserve status of the greenback because of the size of the U.S. trade deficit and the currencys volatility.
Irib News reported that Irans oil minister, Kazem Vaziri Hamaneh, said last week that the creation of an Iranian oil exchange is in the final stages and that the bourse (the French word for a stock exchange) will be launched soon. Tehran has announced the founding of a bourse previously and then called it off. Now it is back. Hamaneh said registration of the Oil Stock Exchange is in progress, and it will begin operating if approved by the Council of the Stock Exchange.
The new marketplace will trade oil for euros, a prospect that greatly concerns Washington and is said by some to be the real reason for talk of an attack on Iran. The euro already has reached an 11-month high of more than $1.26, while striking a three-month low of 113.70 against the yen.
The Federal Reserve has been hinting that it will pause in its upward cranking of interest rates, stopping around 5 percent. Analysts predict that without interest-rate support, the dollar will be dragged down by our deficits.
I think this is it, said Tony Norfield, head of global currency strategy at ABN. The dollar has been propped up by high yields, but markets now are indicating a fall. The issue facing policymakers will be how to manage the dollars drop. It may be a one-way trip, but the decline is likely to be the greatest against Asian currencies.
From the May 10-16, 2006, issue