China to allow Yuan to be used to settle trades normally denominated in dollars
This is bearish news for the U.S. dollar for sure. With China ability to produce goods on a major scale so they will always have something to trade, it looks like the Yuan might become a reserve currency. It should be no surprise that with our reckless bailouts on companies that should of failed that is leading to a devalued dollar is not sitting well with countries that hold much of our sovereign debt.
News:
The pilot scheme was announced in a package of measures designed to help exporters hit by the global downturn. It means if the two parties to a trade have yuan available, they need not enter world exchange markets to pay.
Most of China’s foreign trade is settled in US dollars or the euro, leaving exporters vulnerable to exchange rate fluctuations. The yuan is not yet a freely convertible currency. Officials did not say when the trial scheme would start.
Pimco limiting U.S. Treasuries exposure as supply builds
Good move on their part. With the amount of issuing that is going to take place over the next 12 months, I would not want to have too much into treasuries. Many economist are calling the dollar, “the next bubble to burst”. Now with President-elect Obama, he needs to get serious about creating jobs in our country.
I would say infrastructure in our highway system, transportation (rail) and energy should be his priority in reverse order. These type of projects are great for creating jobs. I would also do a mix of federal programs and private programs through our bidding process will be a nice balance. I think we are going to start seeing inflation pick up as soon as people start feeling more confident and that will be are next major crisis. You really notice inflation when the velocity of money speeds up through economic activity.
Release:
Fund manager Pimco is limiting its Treasury holdings amid expectations the United States will ramp up issuance to pay for a slew of new programs aimed at easing the credit crisis, Chief Executive Mohamed El-Erian told Reuters late Tuesday.
U.S. Dollar drops most since 1985 before Fed’s decision on rates
You should not be surprised at this action in the currency markets. With the 50-75 basis points cut coming later this afternoon, logically it should be dollar negative with the easing of credit. We have also had some serious money printing to bailout almost every type of institution under the sun.
Long-term, we have two distinct paths that will be taken. We will raise interest rates and protect the dollar and suck the major excess of liquidity from the economy. Or, we will continue easing and keeping interest rates at this historically low levels, that will lead to massive inflation down the road when the economy picks up.
News:
The dollar fell the most since 1985 against the currencies of six major U.S. trading partners as economists forecast that the Federal Reserve will cut the target lending rate by a half-percentage point today.
Yen rises on bets carry trade to evaporate on economic turmoil
As the the carry-trade(borrow yen to purchase higher yielding assets) unwinds, the Yen has been strengthing at a profound level. According to Bloomberg, the Yen is trading at a 13-year high against the U.S. dollar. Near the bottom of this article, it mentions the Aussie Central Bank(ACB) has been conducting open market operations to purchase the Aussie Dollar to give it support after it has dropped over 30% in past months.
Article:
The yen rose to the strongest level versus the euro since May 2002 and traded near a 13-year high against the dollar as global economic turmoil encouraged investors to sell higher-yielding assets funded in Japan.