Yup that’s right.
Talk of the end of dollar hegemony may be premature. The latest contrarian ‘smart-money’ bet, partly fuelled by commentary from the likes of Nouriel Roubini and Martin Wolf on what might happen when the “mother all of carry trades” dislocates, is apparently gambling on the prospect that the dollar will shortly surge.
Business Insider’s Joe Weisenthal draws attention to the view of Elliot Wave analyst Robert Prechter on the matter via Tech Ticker (our emphasis):
Ever the contrarian, Prechter cited the heavy bearish sentiment on the dollar when he made similar predictions here in August. Since then, the Dollar Index has made new lows but the dollar has shown intermittent signs of life; in addition, Nouriel Roubini, Martin Wolf and others have made similar forecasts about the potential for a dollar rally. In the accompanying clip, Prechter also makes the seemingly counterintuitive argument that the dollar will rally because there’s so much debt, rather than being doomed because of it. If the economy turns sour again in 2010, as he predicts, Prechter says the dollar will benefit as more dollar-denominated IOUs get called by creditors seeking to shore up their own balance sheets, as was the case in 2008.
Business Insider also flags up the following Reuters article claiming China might actually be on the brink of a major dollar shortage. As the article states:
Resurging expectations of yuan appreciation have made dollars more scarce in China’s foreign exchange market, tripling six-month dollar funding costs and creating new complications for Beijing’s stable yuan policy. Over the past two months, Chinese banks have become eager to sell extra dollars to the central bank, fearing the US currency could fall in value, while their corporate clients are increasingly keen to borrow dollars to buy yuan, to speculate on yuan appreciation or for arbitrage.
They go on to quote dealers as follows:
“There is an acute dollar shortage on the market,” said a dealer at a Chinese commercial bank in Shenzhen. “The situation is likely to worsen in coming months as banks don’t want to retain dollars and some of their clients are borrowing dollars to conduct arbitrage trading.”
“Dollar funding costs have become the latest victim of yuan appreciation expectations,” said a European bank dealer trading on the market, China Foreign Exchange Trade System (CFETS). “And rises in these costs could in turn become another source of pressure for China to eventually permit its currency to resume appreciating.”
According to the article the six-month dollar lending rate on the Shanghai-based CFETS was 122 basis points above the six-month dollar London interbank offered rate on Thursday, against a negative 5 bps on Sept 1. They write that the jump means six-month dollar funding costs have risen to an annual rate of 1.79 per cent from only 0.68 per cent on Sept 1. As Reuters explains:
Banks must sell dollars in excess of their official quotas to the central bank, and cannot borrow dollars beyond amounts set by regulators or sell dollars short in the spot market. Dollar funding costs have at times, however, surged to levels that hinder normal business.
In March 2008, the six-month funding cost rose to an annual rate of 14 percent, 7 percentage points above the official benchmark rate for yuan loans at that time and effectively cutting off dollar fund-raising lines to corporations.
Related link:
The dollar shortage problem, evaluated – FT Alphaville