The news for the US dollar just gets worse and worse. The greenback started the week much as it finished the last, edging back towards the record low posted on Friday and homing in on the €1.50 mark.
Wolfgang Munchau, writing in the FT, thinks that the latest TIC data show that the weakening dollar constitutes an economic sea change - not just a short-run sell off. It represents the breakdown of what has become known as Bretton Woods II, the idea that newly industrialised countries peg their currencies to the dollar at an undervalued exchange rate in pursuit of export-led growth. In return, they invest their loots back into the US, which acts as an anchor and consumer of last resort.
But no more. The TIC data show a massive drop in net foreign purchases of US long-term securities since the end of June. The numbers that are meant to be large and positive to offset the US trade deficit this summer turned negative.
To get an idea of the magnitudes involved: foreign net purchases of long-term US securities — the difference between foreign purchases of US securities and US purchases of foreign securities — had been running at an average of about $70bn a month in 2005, and a little higher in 2006. The monthly net inflow in June this year was still a strong $99.9bn but that figure dropped to plus $19.5bn in July, minus $70.6bn in August and back to plus $26.4bn in September.
This suddenly looks like a big structural shift, says Munchau. Yves Smith at Naked Capitalism also has taken a look at the collapsing demand for US financial assets - and on Monday links to a Bloomberg story that argues, humiliation of humiliations, the dollar’s use in the carry trade is on the up.
It looks like the Bretton Woods II system is breaking down. What comes next is hard to call, Munchau adds. The dollar’s monopoly may give way to a duopoly of the dollar and the euro. Or another theoretical possibility could be the emergence of regional exchange rate regimes.
Lombard Street Research last week made the call that the UAE dollar peg is on its last legs. The markets, notes LSR’s Gabriel Stein, refuse to believe in the determination of the Gulf states to stick to the pegs - because rather like some of the ERM countries in the early 1990s, they are being forced into macro policy that is “wholly inappropriate for the needs of the domestic economy.” That disparity will only increase. The latest decision by the UAE central bank to cut rates smacks of desperation, says Stein. The endgame has begun.
