Curious Capitalist

Foroohar: Chaos in DC Is Taking Its Toll on the Dollar

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The shutdown is over; the U.S. dollar remains the world’s reserve currency. But for how much longer? At what point will foreign creditors and the markets at large begin rethinking their asset allocation, and moving slowly away from the dollar and U.S. Treasury bills, and into other safe haven assets? That’s a question that analysts are already asking in the wake of a debt deal that merely kicks the can down the road into early next year. “The prospective framework looks to be one of hopping from one short-term fix to another shot term fix, with each ‘fix’ being accompanied by a potentially disruptive political process and 11th hour negotiations,” says Michael Purves, chief global strategies for institutional broker Weeden & Co. “While future debt ceiling wrangling will more than likely not lead to default, this type of process takes its toll on US credit perceptions.”

Indeed, it’s telling that gold is sharply up following the debt ceiling resolution. While investors didn’t turn to gold, which is a safe haven asset, during the debt ceiling fights, the fact that they did so post deal means that the markets aren’t completely happy with an agreement that simply brings us another, similar fight in a few months time.

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It will be even more interesting to see what Chinese T-bill purchase data—which is released a couple of months after the fact—tells us about what our largest foreign creditor was thinking during the shutdown. Back in August of 2011, Chinese T-bill purchases slowed during the debt wrangles, but then picked back up quickly afterwards. But the global environment then was quite different. Europe was in an even bigger debt crisis (a real one, involving serious economic rather than political issues), and emerging markets were slowing. Now, Europe seems to be getting its act together, and China has averted a hard landing, at least for the time being. It could be that this is the moment when foreign creditors being looking to diversify their assets.

Last week Xinhau, the official Chinese government news agency, publicly commented that “it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.”

Of course, that’s easier said than done. It will be decades before the Yuan is truly a global currency. And existing safe haven currencies, like the British pound and the Swiss franc are too small as markets to replace the dollar. But even major shift in the global currency system happens slowly, over time. It took decades and two wars for sterling to be replaced by the dollar. But eventually, it happened. As other nations rise, and our political dysfunction continues, we may look back to the fall of 2013 as the beginning of the post-dollar era.