There was an article last night on Bloomberg about the Aussie going up against the dollar because of rumors that China "may switch out of U.S. dollars to diversify its more than $1 trillion in foreign-exchange reserves."
I have never been a believer that China will sell enough dollars to move the market meaningfully and I'm still not but I have expressed concern about the possibility that China buys fewer dollars in the future. The above article theorizes that China would buy more Aussie dollars for several reasons including the fact that it buys a lot of natural resources from Australia.
This is one reason that I have been a believer in the Australia theme for a while and have had client money invested there as well.
There have been stories of other smaller countries selling down their dollar exposure in favor of a more diversified currency reserve. Those countries are small enough that they can sell without much impact. China cannot sell without impact unless they do it v e r y s l o w l y. China owns so many dollars that selling enough to move the market is not in their interests. Of course fear of what they might do could move markets.
But they may buy less in the future. This seems much more plausible to me. Either way this is important to monitor. I would expect Australian investments to do well, Chinese investment should do well for US based investors and other big G-10 currencies should also do well. If China does buy fewer dollars they are going to buy other currencies. Investments from those countries could do well in dollar terms.
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5 comments:
Dollar decline is inevitable as other countries increase productivity. This is a theme we can count on for several decades.
A dollar decline is not inevitable. The sweatshops in Asia increase productivity? I think not. The EU with its broad cradle to grave socialist policies that perpetuate mediocre productivity and career unemployment? I think not.Canada? Nope. South America? Say "siesta".Africa? This continent has yet to discover productivity. They prefer corruption and tribal wars.India? Perhaps, but not likely for the bottom 85% who live there in terrible poverty.Middle East? Jihad trumps gainful productivity.
What will set off a decline in the dollar is Democratic protectionist legislation as a reward for far left and union minions supporting their candidates November 7th.If the United States rolls back global trade with EU-style labor and trade edicts, then you will see China and other countries that trade with us exact revenge and dump dollars.
I do not know what the ramifications of all this will be.
T I tink you need to look at Asian GDP growth rates. They are huge. They were so unproductive for decades and in many ways still are. But this will not continue. Asia will follow a similar path to Japan from 1960 to 1990.
They have been adopting capitalism and studying our play book. Their increased productivity is inevitable.
Why would China want to strengthen the Aussie dollar by buying it? If they are buying raw materials from them would they not want to keep the Aussie currency weak relative to their own?
I agree with 'T' in so far as we have a tendency to focus on our own problems, and forget that the rest of the world has a boatload of their own problems as well.
Russell120,great question.
I don't think China wants the Aussie to go higher but if there is anything to this it would be about China not wanting to be stuck with too many dollars. Either way any amount that might make its way into Aussie from China will be a small sliver compared to China's US dollar exposure. I think though here is than many currencies will get a lift from this.
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