So writes Louis Basenese (wallstreetdaily.com) in edited excerpts from his original article* entitled A $7-Trillion, Currency Catch-22.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Basenese goes on to say in further edited (and in some places paraphrased) excerpts:
In the aftermath of the Asian financial crisis in 1997, Asia’s central banks swore to never let it happen again and their defense strategy couldn’t have been more straightforward: stockpile U.S. dollars. After all, what could ward off financial calamity better than a surplus of the world’s largest, most liquid and most trusted currency?
Fast forward to today, though, and Bloomberg reports that Asian governments now collectively hold upwards of $7 trillion in currency reserves, with the majority parked in the troubled U.S. dollar via U.S. Treasury bond investments…
What was supposed to be an asset has now become a staggering liability – and they can’t do a thing about it.
If China, the largest U.S. lender, decides to start liquidating its $1.3 trillion in dollar holdings, the dollar would plunge causing the Yuan to soar and a soaring Yuan would completely undermine China’s already-wavering economy, which remains heavily reliant on exports. As Leland Miller, President of China Beige Book International, told Bloomberg, “They understand they have no option but to accept the hand they’re given.”
Same goes for the second-largest U.S. lender, Japan, with $1.1 trillion in dollar holdings.
Prime Minister Shinzo Abe came to power in December 2012 with a clear directive to reinvigorate the Japanese economy by weakening the yen and he’s succeeded. The yen is down about 17% since mid-November, and exports were up for four months in a row through June. Were he to bail on the U.S. dollar, though, he’d be throwing all that progress out the window. The dollar would tank, as the yen soars.
Ironically, the best thing for Asian economies to do…is just keep loading up on U.S. debt because doing so holds down their local currencies, which keeps their exports competitive. Of course, it also supports the U.S. government’s mounting debt addiction but there really is NO other choice.
The above explains why the U.S. dollar’s share of global foreign-exchange reserves is rising. It’s up to 62% in the first quarter, from a low of 60% in June 2011, even though the fundamentals underpinning the currency keep worsening.
Long ago, Asian governments started banking on the U.S. dollar to protect against future financial calamity. They overdid it so, while it might not be their currency, it’s become their problem to keep it strong.
For our sake, let’s hope self-preservation remains their number one priority. Otherwise, the dollar is doomed – and there’s likely nothing our elected officials in Washington can do about it!
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
* http://www.wallstreetdaily.com/2013/08/06/debt-ceiling-dollar-yuan-yen/ (© 2013 Wall Street Daily, LLC. All rights reserved.)
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