"The US Dollar - Panic of 2005"

By Ricardo C. Amaral

February 23, 2005

Now that South Korea, and Russia have started selling their US dollar reserves, the central bankers of the other countries from around the world have to start selling their US dollar positions as well; otherwise they will look foolish in their countries, and to the international central banking community. How they will be able to justify, holding the US dollar positions when we all know that the US dollar will have a steep decline in 2005.

Now that the stampede is about to speed up around the world, the US dollar should decline to at least the range of $ 1.50 – $ 1.60 to Euro 1.00 in the near future.

If the stampede becomes a “Panic Selling,” then we will have a major international monetary crisis in the world, because of this steep US dollar decline in world markets.

Now we know which central bankers are the smart ones; they are trying to get rid of their US dollar positions, before the rest of the heard realizes what is going on.

The central bankers, who don’t dump their US dollars as soon as possible, will look foolish in the future, and they will have to do a lot of explaining to the people of their countries. Why their monetary reserves lost so much value, and they stayed in the sidelines watching the decline of the US dollar without taking any action?

In the future we will refer to this historic period as the “PANIC of 2005.”

Copyright © 2005 All rights reserved.

By: Ricardo C. Amaral

Author / Economist

brazilamaral@yahoo.com

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Quoting from Reuters – February 22, 2005

“Dollar sinks as South Korean reserve shift weighs”

The dollar tumbled on Tuesday as markets grew concerned about the likely impact of South Korea's plan to diversify its reserves out of U.S. assets, pushing the currency below key technical support levels.

South Korea's central bank, which holds a large chunk of U.S. Treasuries, said on Monday it planned to spread its reserves, which are the world's fourth largest, among a greater variety of currencies.

"The dollar is under pressure. This started early in the Far East, with news of South Korea's plan to change reserve ratios," said Andrew Busch, global FX strategist, capital markets, with Harris Nesbitt in Chicago.

"It comes on the heels of Russia saying the same thing. This has fueled speculation that Japan may do the same. That basically hit us and it ignited the euro to rally and continue to put in new highs" against the dollar, Busch said.

Late afternoon in New York, the euro was trading around $1.3252, up about 1.5 percent from late on Monday.

How long the news will weigh on the dollar depends in part on whether the euro pushes above a key resistance area around $1.3270, said Tim Mazanec, senior currency strategist with Investors Bank & Trust in Boston.

According to U.S. Treasury data, South Korean public and private investors hold $69 billion of Treasury debt, while the central bank's foreign exchange reserves are worth some $200 billion.

…Following South Korea's remarks, the dollar tumbled to multi-week lows against most major currencies, seven-year lows against the Korean won and 22-year lows against the New Zealand dollar….Against the yen , the dollar was at 104.00 yen, down 1.5 percent from late Monday.



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February 22, 2005

The above Reuters report might be indication that the stampede to dump the US Dollar that I mentioned in various articles in early 2002 - is underway.

Here I am quoting from my letter to the president of the “European Central Bank” dated December 12, 2001. This letter was published on various newspapers and magazine articles in early 2002.

…The long-term US trade imbalances have created a large pool of US dollars in the hands of relatively few central banks around the world. These nations continue to run large trade surpluses with the United States, and they continue to increase the pool of US dollars held by their central banks.

Forbes Magazine's columnist Steve Hanke estimates that today 70 percent of US currency circulates outside the United States. The major holders of this currency are the euro countries, Japan, China, Hong Kong, Taiwan, South Korea, Indonesia, and Singapore.

Probably today, there is an oversupply of US dollars outside of the United States. Gold at US$ 295/oz might be undervalued when compared to the US dollar.

At US$ 295/oz gold provides about 15 percent of official world monetary liquidity. Central banks hold only one-third of the above ground gold supply available. Gold is the second largest component of international monetary reserves after the US dollar.

Gold and the euro will became increasingly important parts of the international monetary reserve system and their gains will be at the expense of the US dollar.

If any of these countries decides to move their monetary reserves from the US dollar into gold, the price of gold would increase versus the US dollar. If that happens in the near future we will have a major international monetary crisis in the world.

About 75 percent of the US dollars circulating outside the United States are in the hands of these few Asian central banks, and if any one of these countries decides to sell their US dollar monetary reserves to buy gold it will produce a stampede to exit the US dollar, creating a gold and euro buying panic.

Remember the euro countries also have a large supply of US dollars, which they can use to buy gold. When the European Central Bank moves from US dollar into gold, the euro will become stronger versus the US dollar, in turn giving an incentive to the other countries to move their international monetary reserves also from US dollar into euro or gold.

When this US dollar collapse becomes reality, the less developed countries will be the most devastated by this event, because these countries hold only a small fraction of their reserves in gold or euro.

This oversupply of US dollar circulation outside the United States might prove to be the Achilles heel of the US economy and also can become a nightmare to the Federal Reserve. The Federal Reserve would need to raise interest rates in the US, creating a major problem for the US economy and the financial markets.

I believe that it will be too risky for Brazil to adopt the US dollar because of this oversupply of US dollars circulating around the world. It will be better for the Brazilian economy in the long run for Brazil to adopt the euro.

The current US dollar based international financial system is about to go through a dramatic change because of the new competition from the euro. I don't know, when or what will trigger the coming events, since no finance minister or central banker wants to be blamed for launching the world into a major international monetary crisis.

Copyright © 2005 All rights reserved.

By: Ricardo C. Amaral

Author / Economist

brazilamaral@yahoo.com

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