Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Gold And Silver – Elite Supernova Death Dance In PMs? - 1st Nov 14
Pretium - Canadian Golden Elephant - 31st Oct 14
What USA Today Got Wrong About the Stock Market Fear Gauge - 31st Oct 14
Election Result - Labour Wins South Yorkshire Police and Crime Commissioner - 31st Oct 14
Gold Price Falls, Stocks Record Highs as Japan Goes ‘Weimar’ - 31st Oct 14
EUR/USD - Double Bottom Or New Lows? - 31st Oct 14
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Free Forex Forecasts

U.S. Government Shutdown: Next Step Dollar Collapse?

Politics / US Dollar Oct 04, 2013 - 10:27 AM GMT

By: Sahil_Hafeez

Politics Not a single person might make a conciliatory sentiment for rehashing cautioning that, on account of the grim Obama administration and Republicans, Uncle Sam is closed down. Genuine monetary analysts are currently anticipating mobs in the streets that there is presently nothing the USA can do to avert the fall of its currency, and its economy. It has no reserves to back its worth, and has the most indebted country in the world, is dependant of the credit from America's previous foes.


Throughout the most recent numerous days, both Russia and China have said they will be exchanging their impressive dollar holds into Euros. It will soon achieve the sum downfall of the dollar, and the American economy. Hence, every living soul needs to make one thing richly clear; it is not a matter provided that US is set to have a currency collapse, it is when. And when is much sooner than later. It could happen tomorrow, one month from now and even one year from now. Here I want to include a quote from James Rickards, the creator of "Currency Wars," says this:

This was the analysis and bits of hearsay of worldwide markets. Right away we should observe how it is conceivable dollar might collapse by offering my replies to some essential inquiries for those financial commentators.

What is a dollar crash (cave in)?

A dollar cave in (collapse) is the point at which the worth of the dollar falls so quickly that every one of the aforementioned who hold the dollar panic, and offer them at any expense. In this situation, sellers might incorporate: foreign governments who hold U.S. Treasuries, traders in exchange rate futures who exchange the dollar versus different currencies, and individual speculators demand assets denominated in anything other than dollars. The fall of the dollar implies that everybody is attempting to offer their dollar-denominated assets, and not a single person needs to purchase them, driving the worth of the dollar down to close to zero.

What are the explanations why the U.S. dollar turns down? Will it harm or help the U.S. economy? Right enough to make a complete crash of the dollar, as the large groups (financial commentators) are cautioning?

The dollar decreases when it loses value in relationship to foreign currencies. When this happens, the dollar can purchase fewer foreign goods, expanding the cost of imports and creating inflation. Furthermore, investors in U.S. Treasury bonds will sell their dollar-denominated holdings.

What might make this happen (Dollar breakdown)?

Numerous conditions must be set up soon after the dollar could break down.

 There must be an underlying shortcoming.
 There must be a reasonable currency alternative for everybody to charge into.
 A triggering occasion might need to happen.

The leading condition does exist. The dollar declined 51% against the euro between 2002 and 2013. Why? The U.S. debt more than tripled throughout that time period, from $5.9 trillion to $16.738 trillion. This expands the chance the U.S. will let the dollar's worth slide, permitting it to repay the debt with cheaper money.

Is there a reasonable alternative to the dollar?

The dollar's value is strong as measured by central bank reserves. The dollar imparts of IMF reserves totaled $3.76 trillion in the second quarter from $3.766 trillion in the first quarter, as per the IMF, or about 61.9 percent of aggregate reserves. The following most well known currency is the euro reserves rose to US$1. 446 trillion or 23.8 percent of the sum, in the second quarter from $1.431 trillion in the first quarter. The yen's impart tumbled to 3.8 percent in the second quarter from 3.9 percent in the earlier quarter.

Countries in the euro region fringe, for example Greece, Italy, Portugal, and Spain, France yet to have recouped from past enormous capital flight and euro zone turns from financial to political crisis have debilitated the euro as a viable alternative to the dollar as a worldwide currency.

What event could bring about dollar breakdown?

China and others have contended for a new global currency. Nonetheless, replacing the dollar might be a massive undertaking, might require incredible worldwide resolve and not happen rapidly.

Out and out, foreign countries claim $5.1 trillion dollars in U.S. debt (as of May/2013). In the event that China, Japan or other major holders began disposing these holdings of Treasury notes on the secondary market, this could make a panic leading downfall. China possesses more than $1.31 trillion in U.S. Treasuries. That is since China pegs its currency, the Yuan, to the dollar. This keeps the costs of its exports to the U.S. moderately cheap. Japan possesses more than $1.11 trillion in Treasuries, likewise keeping its currency, the yen, low to animate exports to the U.S. Japan is attempting to move out of a 15 year deflationary cycle, and the 2011 earthquake and nuclear disaster haven't made a difference.

China and Japan can, yet won't, brings about dollar breakdown? Might China and Japan ever truly isn't that right?

Just provided that they saw their holdings declining in value too quick and they had an alternate market to offer their products to. The economies of Japan and China are reliant on U.S. consumers. They realize that assuming that they sell their dollars, their products will cost more in the U.S. and their economies will endure. At this time, it’s still in their best interest to hold onto their dollar reserves. China and Japan are selling progressively to other Asian countries, which are continuously getting wealthier. Then again, the U.S. is still the best market on the planet.

How does China shake U.S. dollar's value? Why does China inherently so much U.S. debt?

China has altered the worth of its currency, the Yuan, to the dollar. At present, a dollar is worth 6.12 Yuan. Numerous experts suppose it is misleadingly low. Provided that China permitted its currency to float freely, it might be more valuable than the dollar in view of China's solid economy, and it might rise. China does this to keep its products cheaper than U.S. products, hence expanding its exports to the U.S.

The only way China can keep the Yuan misleadingly low is to guarantee to recover dollars for Yuan at the settled rate. To do this, it should keep a great supply of dollars available for reserve. Rather than holding dollar bank bills, it holds U.S. Treasuries, which it can rapidly sell for dollars. As China's economy develops, it should purchase more U.S. currency to meet the growing number of Yuan.

Provided that it did happen (dollar crumple), what might happen next?

A sudden dollar fall might make worldwide monetary turmoil as investors hurry to different currencies, for example the euro, or different assets, such as gold or different items. Demand for Treasuries might dive, driving up interest rates. Import costs might skyrocket, bringing about inflation.

U.S. exports might be extremely inexpensive, boosting the economy quickly.

Conclusion: Why the dollar won't fall

Numerous say the dollar won't fall in light of the fact that

 It’s backed by the U.S. Government, making it the world's safe harbor currency.
 It’s the all inclusive medium of trade, on account of the U.S. (still generally) complex financial markets.
 The major oil contracts are still priced in dollars.

Many in Congress need the dollar to decay in light of the fact that they accept it will help the U.S. economy. A weak dollar brings down the cost of U.S. exports with respect to outside goods, making U.S. products more focused. Indeed, the decrease in the dollar served to enhance the U.S. Trade Deficit in 2012. Obama. Republicans and FED might have not been worried about dollar freely declining its value. It would help U.S. to cover the trade deficit. (Obama, Republicans and FED drama behind delay in tapering and the government shut down)

On the other hand, the fall of the dollar will throw the planet into a worldwide misery. Those countries with huge outside debt won't trade sufficient to procure the income to service their debts, and will slide into bankruptcy. The economies of Europe, New Zealand, Australia, Canada and the UK will likewise completely crumple, as an aftereffect of their indebtedness and not having the ability to service their borrowings. The Asian economies, which have hinged on American trade, will additionally be extremely influenced. Be that as it may, they will recuperate after a period, however just after significant political and economic turmoil. Despite the fact that the dollar has declined incredibly throughout the most recent ten years, it has not yet made a breakdown. It's not to the greatest advantage of most nations to permit this to happen; since it might diminish the value of their dollar holdings.

By Sahil Hafeez
Financial Analyst

sahilhafeez@ymail.com

Qualifications: MBA, CFA, FRM

Current City: Hong Kong

© 2013 Copyright  Sahil Hafeez - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014