Tags: dollar | euro | US | China

US Dollar Feels the Global Hostility

By    |   Wednesday, 06 November 2013 07:40 AM

It is hard to pinpoint the extent of hostility against the U.S. dollar, but the resentment toward the United States and the U.S. dollar is definitely ratcheting up as time passes.

One always hears that kicking the can down the road can only make things worse as time passes, and one has to pay the piper eventually. I am beginning to sense the eventually may not be that far off now. The walls seem to be caving in around the U.S. dollar faster than before.

The overall relationship that the United States has with the world has taken a beating of late. The National Security Agency (NSA) leaks by Edward Snowden have taken a tremendous toll on the reputation of the United States as a friend and ally.

Let's go on a quick world tour.

Beginning in the Far East, China and the United States seem to be friendly (or maybe not so much) rivals. Japan, sensing the Chinese flexing their military muscle, is on the verge of reversing their World War II commitments and is beginning to build their army and navy might. The United States had a strong influence on Japan, based on its army bases in and around Japan, which is rapidly dwindling. Russia is belligerent these days and with President Putin winning influence on the back of Syria, that threat alert is way up.

A soft but determined battle for control of the Arctic is underway, with Russia, the United States, Canada and Norway each claiming rights to the riches of the Artic.

Moving to Southeast Asia, India has always been wary of the United States. Leaks relating to secret deals between the United States and Pakistan can only make matters worse. Pakistan itself is reeling from Taliban assaults. The United States has not won any major friends in the Middle East. Egypt was an ally, but that is now history. Saudi Arabia is the only powerhouse left in the U.S. court, but with the volatility of the U.S. dollar in pricing oil, next time there is a concerted threat to price oil in non-U.S. dollar terms, the Saudis may not push back too hard.

Europe has now become a political challenge due to the NSA leaks of spying. France, Germany, the United Kingdom, Spain and many other smaller European nations are now extremely unhappy with the United States and want to distance themselves away from the United States. The United Kingdom may be our only ally in Europe.

In Latin America, we have not endeavored to make too many friends. Brazil could have leaned our way, but our spying habits have tempered that relationship too. Others in the region are unstable or too small. Mexico may be our only ally there as of yet.

So with Saudi Arabia, the United Kingdom and Mexico as our loyal friends, the world of influence for the United States is shrinking.

I see the effect of this isolation in the way the U.S. dollar is traded or is valued. It was just announced that the renminbi (Chinese yuan) was used in 17 percent of the world trade last year. So that is 17 percent of global trade that could have been in U.S. dollars but was not. That gives the central banks around the world 17 percent less reason to hold U.S. dollar reserves.

Adding fuel to the fire is domestic woes, such as the obsession with defunding or repealing Obamacare and the sharp divide between the two political parties. Congress has been tied up for three weeks now on this one subject after nearly three weeks of shutdown. No one is convinced that a shutdown might not happen again in January next year. The brinksmanship around debt default (twice) has left the world leery of U.S. leadership on fiscal matters. They are forced to wonder if the United States is worthy of the global reserve currency crown.

The reflection of all of this is clear in the value of the U.S. dollar. The euro (which is the anti-dollar trade) surged to a high of 1.38 before falling back recently. Despite the tremendous uncertainty in Europe, the world prefers the euro to the Dollar. They even prefer to sign bilateral currency deals with China and deal 17 percent of global trade in yuan than use the dollar.

Have you had enough yet? Have you started diversifying?

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It is hard to pinpoint the extent of hostility against the U.S. dollar, but the resentment toward the United States and the U.S. dollar is definitely ratcheting up as time passes.
Wednesday, 06 November 2013 07:40 AM
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