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Jim Rogers: Dollar Faces Unavoidable Crisis

By Ellen Chang and Dan Weil   |   Thursday, 17 Sep 2009 09:15 AM

The U.S. dollar faces more uncertainty and a currency crisis is unavoidable, says commodities guru Jim Rogers.

The economy could take further hits as debt levels remain high, he told CNBC. The recent rebound is only a reaction to consumption falling immensely in 2008.

"How can the solution for debt and consumption be more debt and more consumption? How can that be the solution to our problems? I would expect there to be a currency crisis or a semi-crisis this fall or next year,” Rogers warned.

Expectations that China will solve the world’s recession are overstated, he said.

"China saved up a lot of money for a rainy day. It's raining and it's spending it," he said.

"But China cannot pull out America or India or Europe from all this. Their economy is a tenth of the U.S. Hallelujah, let them do good things, but they're not going to save the world."

Currency issues could start soon, since the U.S. government’s debt level has increased enormously while the Federal Reserve has tripled its balance sheet, he said.

"We're going to have some serious problems in currency markets, we're going to have serious problems in the world markets if we see protectionism rising and rising again," Rogers said.

The dollar continues to decrease compared to other currencies, in part because of low interest rates, reports Forbes magazine. Central banks are not a fan of this dilemma.

“The obvious thing is to step in heavily by purchasing dollars by selling their own currency," said Sebastien Galy, senior currency strategist at BNP Paribas.

"They have done this in the past when they wanted to teach the market a lesson, and they would do it either through themselves, or through intermediaries.”

With the dollar heading down in a hurry, the new hot trade consists of shorting the greenback to take advantage of higher interest rates overseas — known as a “carry” trade.

As the dollar slumps to one-year lows, investors are borrowing the currency at near-record-low interest rates, and then selling those dollars for foreign currencies.

Investors then use those currencies to buy securities offering yields up to 8 percentage points higher than U.S. securities, Bloomberg reports.

Those trades now provide their highest returns in more than nine years, according to Bloomberg.

“The dollar is the big funding currency,” Jonathan Clark, vice chairman of FX Concepts, the world’s largest currency hedge fund, told Bloomberg.

“The reason why people are borrowing the U.S. dollar for carry trade is A: It’s very cheap to fund, and B: The expectation is it’s going to go down.”

Until recently, the yen was the currency of choice for the carry trade. But using the dollar became more profitable and less risky than the yen last month for the first time since March 2008, Bloomberg data show.

Many experts remain negative on the dollar.

"The recent breakdown opens the door for more moves down," Richard Ross of Auerbach Grayson tells CNNMoney.com.

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The U.S. dollar faces more uncertainty and a currency crisis is unavoidable, says commodities guru Jim Rogers.The economy could take further hits as debt levels remain high, he told CNBC. The recent rebound is only a reaction to consumption falling immensely in 2008."How...
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2009-15-17
 

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