Soros Explains Dollar Collapse

Soros: Oil Exporters Behind Dollar Fall

We might not like his politics, but we respect his moneymaking prowess.

And few understand currencies like George Soros.

Our ears perked up when Soros explained why the dollar is collapsing.

He said the weakness of the U.S. dollar is no accident - it's the result of Russian and Middle East oil exporters converting their oil transactions from dollars to euros.

"The oil-exporting countries' central banks have been switching out of dollars mainly into euros, and Russia also plays an important role in this. That is, I think, at the bottom of the current weakness of the dollar," Soros was quoted by Reuters.

Speaking to delegates at the Jeddah Economic Forum in Saudi Arabia, the famous investor and political activist said that while he did not expect the dollar to continue to fall, its fate could be tied to the price of oil.

Oil is now selling at about $50 a barrel, down from a high of $55.67 late last year.

"The higher the price of oil, the more dollars there are to be switched to euros, [so] the strength of oil will reinforce the weakness of the dollar," he said. "That is only one factor, but I think there is such a relationship."

Soros, a notorious currency speculator, also told the British news agency that the U.S. current-account deficit could be financed at the present level of the dollar.

"There are willing holders of the dollar. There are the Asian countries that are happy to accumulate dollar balances in order to have an export surplus and a market for their dollars," he said.

Korea Follows Trend, Moves Away From Dollar
 
But Soros may be wrong on one count. China, Japan, South Korea and other nations might not want to continue to hold dollars as their value slides.
 
In a move that threatens to rattle world markets and send the U.S. currency tumbling further, Korea announced its plan to follow the lead of many other countries and move away from the dollar to invest more in alternative foreign currencies.
 
The news caused the dollar to slide on foreign exchange markets and also prompted oil prices to surpass $50 a barrel.
 
These developments reinforce the reality that today's dollar is largely dependent on the decisions made by foreign central banks, which now control huge volumes of U.S. Treasury bonds and other dollar-based securities. 
 
As described in the June 2004 edition of Financial Intelligence Report "The Dangerous Dollar: Protecting Your Wealth By Investing Abroad," "European, Japanese and Chinese banks have been absorbing trillions in U.S. mortgage paper and other debt... Unfortunately, as the dollar falls, so does the return on investment for these foreign central banks."

We also reported in this edition of Financial Intelligence Report that Asian banks were not going to take the fall for the dollar - and that they would not continue to bail us out by buying dollars and dollar-backed debt.

More Free Fall of the Dollar

As word spread that the Korean Central Bank and Japan were selling dollars, overnight press reports seemed to counter those claims.

What should we believe?
 
Perhaps we can glean some insight from our economist friend in Panama, Hans Etienne Parisis.
 
"The Bank of Korea said they would diversify - and that will mean selling dollars...And that's all I'll say about that!" Etienne says.
 
"Yes, as I told you before," he continues, "in today's real world, the euro is the second most widely traded currency in the world and has become the offset currency to the dollar. Basically, that means it matters not that the Eurozone economy is slower than that of the U.S. As the dollar gets weaker, you will see the offset of that weakness in euro strength right away."
 
Etienne goes on to say:

"In international capital markets, the euro captures a 31% share of the trades, up from just 20% in 1999. Roughly 50 countries out of about 200 in the world use the euro as their "anchor" currency in their foreign-exchange policy.

China Attempts To Cool Economy
 
As the Chinese government attempts to rein in an overheated economy and avert a financial collapse, Beijing is severely curbing bank lending and stemming foreign investment, hoping to boost producer prices.
 
And it seems to be working. January saw a 5.8 percent increase in producer prices compared to the previous year. That was preceded by a 7.1 rise this past December.
 
According to The Washington Post, economists say the slowing trend makes it likely that China will be able to successfully decelerate growth without experiencing an abrupt halt that might shatter businesses and jobs and leave banks with billions in defaulted loans.
 
But one sector taking a hit from Beijing's actions is China's previously revved-up automobile industry. Sales have come to a drastic halt, as financing has all but disappeared.
 
Over the last few years, car sales in China had multiplied 35% annually, prompting many U.S. automakers to heavily invest there. But in 2004, growth slowed radically to 15%, and while that number still far exceeds the 1% car sales growth in the United States last year, auto manufacturers are rethinking their aggressive market entry.
 
Regardless, most analysts see promise in China's long-term economic situation.

Social Security Learns From Pension Funds
 
The Bush administration is now advocating stock market investment to subsidize the survival of Social Security.
 
But NewsMax's Financial Intelligence Report was already explaining why that was a bad idea in last October's installment "The Pension Crisis Is Already Here."
 
Private corporate pension funds have long utilized investments. Initially, companies put their money in the safest possible places, selecting low-risk bonds and government-backed vehicles.
 
But gradually the funds began to take more chances, and by the end of the 1990s about two-thirds of most funds were dispersed in various stocks. However, a bear market - like the one that hit in 2000 - almost completely destroyed the equity-rich funds, as stock prices retreated and high interest rates hit.
 
FIR pointed out another problem with pension fund stock investment - one that will become apparent in the next 10 to 15 years: "When it comes time to pay Baby Boomers and other retirees their pensions, a huge number of shares of stock will have to be sold. That in turn will precipitate much lower stock prices, potentially reducing pension payments."
 
These facts provide a strong argument against using the market to finance Social Security.
 
But the Bush administration is expected to suggest investment in an array of assets - 50% broad equity indexed funds, around 30% corporate bond funds and about 20% Federal Treasury bonds, according to Stephen Goss, chief actuary for the Social Security Administration.
 
They project that, over the long-term, this combination will bring an average annual return that is 4.6 percentage points above inflation.

109-109