The dollar crash

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Talk of a dollar crash has been all in the air today. The Daily Telegraph‘s Ambrose Evans-Pritchard, who would have to be taken seriously if only because of that name, but also happens to be a pretty smart and well-connected financial columnist, had this to say (via Barry Ritholtz):

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

“This is a very dangerous situation for the dollar,” said Hans Redeker, currency chief at BNP Paribas.

“Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States,” he said.

And in the FT:

The dollar plunged, government bond yields soared and the price of oil hit a record high on Thursday amid growing concern that interest rate cuts by the Federal Reserve could stoke inflation.

The dollar already has crashed against the freely traded currencies: it’s down more than 40% against the euro over the past few years. That doesn’t mean it won’t drop even further against the euro, but the bigger issue at the moment is with the countries (China, India, Saudi Arabia) that have been formally or informally linking their currencies to the dollar, and are beginning to decide that maybe that isn’t such a great idea. Lots of people in Congress have been begging China in particular to get rid of the dollar link, of course, and the dollar’s decline is, as Michael Phillips wrote in the W$J today, already reducing the trade deficit. But the adjustment could be ugly.

This isn’t the end of the world. It may, however, be the beginning of the end of the rest of the world loaning us money with which to buy large flat-screen TVs.

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