Figure 1: Broad Trade Weighted Value of the Dollar, from January - March 2008. Source: Federal Reserve Board via FRED II, accessed March 17, 2008.
By Kim-Mai Cutler
June 30 (Bloomberg) -- A disorderly decline in the dollar remains a possibility as losses on U.S. assets pile up and the current-account deficit triggers ``a sudden rush for the exits,'' the Bank for International Settlements said.
A plunge in the currency may happen even after its ``remarkably orderly'' 14 percent slide against the euro in the past year, the Basel, Switzerland-based BIS said in an annual report today.
``Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency,'' the BIS said. ``While unlikely, indeed highly improbable for public-sector investors, a sudden rush for the exits cannot be ruled out completely.''
Officials from the Group of Seven nations said after a meeting in Tokyo on Feb. 9 that ``excess volatility and disorderly movements in exchange rates are undesirable,'' signaling policy makers may intervene to prop up the U.S. currency. U.S. Treasury Secretary Henry Paulson said in a radio interview in Moscow today ``a strong dollar is a good thing.''
Implied volatility on options for the dollar was at 10.3 percent today, according to a JPMorgan Chase & Co. index. It was 14.5 percent on March 17, the same level at which the G-7 stepped into the market in 1995 to influence prices.
Widening Deficit
The U.S. current-account deficit, the broadest measure of trade in goods, services and investment income, widened in the first quarter to $176.4 billion, the Commerce Department said on June 17. The U.S. needs to attract $1.9 billion a day from overseas to fund the gap. Foreign buying of U.S. assets rose in April to an 11-month high as total holdings of equities, notes and bonds increased by a net $115.1 billion, the Treasury Department said June 16.
The Dollar Index, which measures the currency against six major counterparts, declined 5.7 percent this year. The U.S. currency fell to an all-time low against the euro on April 22, when it reached $1.6019. Against the yen, it dropped to a 12- year low of 95.76 on March 17.
The declines have raised speculation that economies with fixed-currency systems will end their pegs and that central banks will reallocate foreign reserves away from the dollar, the BIS said. The U.S. currency made up about 64 percent of total reserves in 2007, a figure unchanged from the previous year, according to the International Monetary Fund.
Yen to Strengthen
The yen may also strengthen this year, raising deflation risks for the Japanese economy, which ``remains a significant and worrisome outlier,'' the BIS said.
The Japanese currency has appreciated 5.6 percent versus the dollar this year. It has weakened 2.4 percent against the euro.
``With the effective value of the yen close to a 30-year low, a large current-account surplus and massive exchange-rate reserves, the yen could eventually rise further,'' the BIS said. ``In this case, against a backdrop of sagging trade and continuing sluggish growth, a return to deflation could by no means be ruled out.''
The Japanese currency is forecast to rise to 100 per dollar and 148 against the euro within a year, according to the median of analysts' estimates compiled by Bloomberg. The world's second-largest economy shrank at an annual 0.4 percent pace in the second quarter, a separate Bloomberg survey of 17 economists showed.
To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net
Last Updated: June 30, 2008 09:30 EDTTHE UN Security Council’s March 3 sanctions against Iran not only present a diplomatic victory for President Bush but also a major success for Washington in the first phase of its currency war with Tehran. The war began with the commencement of Iran’s oil bourse in mid-February.
Widely known as the Kish bourse, it is intended to bypass London’s IPE and New York’s Nymex, both of which are effectively controlled by Washington.
The Kish bourse is intended to eventually sell crude oil to the international market in euros. By opening its own oil bourse, Iran became the first Opec insider to attempt the further weakening of an already ailing greenback. If joined by other Opec and Caspian producers, it could serve a death blow to the American economy.
The dollar’s predominance as the world’s hegemonic currency has its genesis in the 1972/73 US-Saudi agreement to price oil exclusively in dollars in return for US protection to the House of Saud against external aggression or domestic overthrow. This arrangement led to Opec transacting oil exclusively in dollars ever since.
The ever-increasing use of oil in the world at a rising price led to an ever-rising demand for the dollar as the world’s reserved currency, enabling America to export a cheaply produced good with handsome dividends. Given the relative decline of American industrial output over time, the dollar’s hegemony has become vital for its economy. Once it was established, the Opec kingdoms never challenged the dollar’s hegemony. They put a high value on US protection which guarantees their political survival and their territorial integrity. The kingdoms’ borders are arbitrarily drawn to meet twentieth-century politico-economic needs rather than delineate ethnic patterns. The parameters of Washington’s protection include maintaining the regional status quo plus monitoring the kingdoms’ domestic fronts for rebellion. Because this deal ensures mutual survival, its tenacity remained impervious to secondary political causes.
Paradoxically, the maintenance of the status quo has been disrupted by the US itself. In 2000, Saddam Hussein demanded that Iraqi oil sale in the UN-administered Oil For Food programme be transacted in euros. The UN conceded and Saddam further declared his intention to open Iraq’s own oil bourse. Washington saw this development as dangerous and sacked Saddam by invading Iraq in 2003.Thereafter, Iraq’s oil sales reverted to the dollar. However, ‘peak oil’ concerns led to Washington’s occupation of Iraq. With continued occupation, the show of armed commitment to the greenback became counterproductive and led to the beginning of the petering out of the kingdoms’ commitment to the dollar. Instead of guarantor, Washington now appears as a threat to the status quo. Anti-US sentiment in Arab societies frightens the monarchs into believing that if Washington invades more Middle Eastern countries, this sentiment would deepen and eventually target their households.
Hence a rising notion within the royal families that if stripped of its dollar hegemony, the US could be deprived of unlimited credit for waging further wars in the Middle East. In the third Opec summit meeting in Riyadh in November 2007, the issue of the dollar’s depreciation, though not incorporated in the final declaration, was assigned to the kingdoms’ respective finance ministers to study.
Given the de facto taboo on this subject, this is a significant development that may have prompted Bush to make a journey to the Saudi kingdom later in January 2008.
Though Iraq, Iran and Petrocaribe’s (Venezuela’s) switch from the dollar is due to political vengeance, it makes economic sense. If a bourse trades oil in euros, other countries can build up their reserves of an ascendant euro instead of having to replenish the rapidly depreciating dollar. However, two interrelated developments threaten Iran’s oil bourse. One is Ahmadinejad’s rise to power and his belligerence towards Israel, a UN member state; the other is Washington’s corresponding success in building up an international consensus against Iran.
The industrial group reorganised the sanctions regime in 1996 at the behest of the US under the Wassenaar Arrangement. Functioning parallel to other treaties monitoring proliferation, Wassenaar shifted the target of technology-transfer curbs from Communism to individual states who “exhibit dangerous behaviour”. At the time of signing, Washington tried to designate the Middle East as a “destabilising region”. Other members refused as they did not want regional bias inducted into the Wassenaar regime. Their concession confines to granting Washington endorsement for its designation of Iran, Iraq, Libya and North Korea as “rogue states”.
Given the shift in the sanctions target, Iran under Khatami realised that the most serious danger it faced was American ability to deny it access to arms, technology and the hard currency necessary to procure technology. Consequently, Khatami launched a conciliatory policy from 1997-2005 called the “Dialogue of Civilisations”, the success of which greatly complicated Washington’s manoeuvres against Iran.
In an interview with CNN in January 1998, Khatami apologised to the Americans for the hurt caused by the siege of their embassy during the 1979 revolution. This softened public opinion about Iran and led to a series of athletic exchanges between Iran and the US. Khatami’s gains in the Middle East multiplied with Tehran’s hosting of the 1997 OIC summit, increased ministerial exchanges in the Gulf, and a handshake with the Israeli prime minister at the Pope’s funeral in 2005. The US was forced by its European allies to repeal the imposition of secondary sanctions over European investment in Iran’s energy sector.
Moscow abandoned the Gore-Chernomyrdin agreement between Russia and the US that limits the sale of Russian conventional arms to Iran. In 2004, Iran reached an agreement with Britain, France and Germany on nuclear cooperation for peaceful purposes. Khatami’s principles remained firm. Alongside appeasement, Khatami test-fired Tehran’s first indigenous missile that reaches Tel Aviv, inaugurated Iran’s own indigenous arsenal and announced the plan to open Iran’s oil bourse. Bereft of its anti-Iran clout, Washington remained largely ineffective in opposing these developments.
Ahmadinejad’s “dangerous behaviour” nullified Khatami’s gains. Since Dec 23, 2006, Ahmadinejad has failed to comply with successive UNSC resolutions against Iran. Correspondingly, Washington has succeeded in gaining multilateral cooperation in successively tougher sanctions against Iran that are “targeted financial measures” aimed at incapacitating key sectors of Iran’s economy. These include the amputation of Iran from the global and the Gulf’s financial infrastructure and enforcing the withdrawal of foreign investment in the development of Iran’s oil and gas sector.
UNSCR 1803 of March 3 will severely hamper the functioning of the Kish bourse. However, should the bourse malfunction, it will be deemed to have been due to sanctions instead of market forces. This means the Kish bourse’s malfunction will not deter plausible moves in this direction by other oil producers.
The writer is an energy consultant and analyst of energy geopolitics based in Washington, DC.
zeenia.satti@yahoo.com
Opinion: Bin Laden to blame for U.S. economic woes?
Attacks of Sept. 11 triggered a series of events that have sapped government coffers and non-military spending
(Reuters)—Past performance is no guarantee of future behavior but it can’t be long before Osama bin Laden issues a message crowing about the parlous state of the U.S. economy and hailing it as a success for al Qaeda.
Last September, on the sixth anniversary of the attacks on the New York Twin Towers and the Pentagon, a bin Laden video included a line on “the reeling of many of you under the burden of interest-related debts, insane taxes and real estate mortgages.” A few days before the 2004 presidential election, his message said al Qaeda was on track with its oft-declared policy of “bleeding America to the point of bankruptcy.”
At the time, a gallon of gasoline hovered around $2, the housing bubble was still inflating, and the word recession was rarely uttered. Now, the price of gasoline has soared past $4, hundreds of thousands of Americans have lost their homes, the Labor Department has just announced the U.S. economy lost jobs for the fifth straight month. Plenty of material for an al Qaeda speechwriter.
How much of the trouble is due to the chain of events bin Laden unleashed with the September 11 attacks? Those strikes prompted the war in Afghanistan, meant to wipe out al Qaeda, capture bin Laden and bring him to justice. That was followed by the war on Iraq and a host of security programs under the umbrella of what the Bush administration calls the Global War on Terror.
Barack Obama, the presumptive Democratic nominee for next November’s presidential elections, has accused the Bush administration of having neglected the hunt for bin Laden. John McCain, the presumptive Republican nominee, says in campaign speeches that he knows how to capture bin Laden and will follow him “to the gates of hell.”
Better late than never. Bin Laden and his top commanders slipped away from their U.S. special forces pursuers in Afghanistan at the end of 2001. Washington then began focusing not on the mastermind of September 11 but on Iraq’s Saddam Hussein, who had nothing to do with it. The 2003 U.S. invasion of Iraq convinced millions of Muslims that al Qaeda was right in portraying the U.S. as anti-Islam and intent on seizing the Middle East’s oil riches.
Bin Laden’s assertion that the Iraq war is bleeding the American economy is now in synch with most Americans. A recent New York Times/CBS showed that 67% believe the war in Iraq has contributed “a lot” to America’s economic problems.
In the words of Joseph Stiglitz, the Nobel prize-winning economist: “The Iraq adventure has seriously weakened the U.S. economy...You can’t spend $3 trillion on a failed war and not feel the pain at home.”
Harvard University budget expert Linda Bilmes says the war is diverting government expenditures from schools, roads, research and other areas that would have stimulated the economy in the short run and accelerated growth in the long run.
There are other factors for the downturn, including weak regulation of complex financial instruments combined with loose lending standards for mortgages. But perception is reality.
As the 20th anniversary of al Qaeda’s founding approaches, next August, America’s leading terrorism experts are engaged in a public dispute over how best to fight terrorists, and who is most dangerous— “Qaeda Central” or a new generation of potential terrorists.
On one side of the argument is Bruce Hoffman, a Georgetown University professor who says al Qaeda has recovered from a series of blows and is back plotting large-scale international operations from safe havens along the Afghan-Pakistan border.
On the other side is Marc Sageman, a forensic psychiatrist and former CIA officer who ran operations in Pakistan. He says al Qaeda is a fading force, still dangerous but yesterday’s men. In a book entitled Leaderless Jihad, he says the biggest threat now comes from “self-recruited wannabees” who find each other on the Internet.
“They are young people seeking thrills and a sense of belonging and significance in their lives. And their lack of structure and organizing principles makes them even more terrifying and volatile than their terrorist forebears.”
Examples of leaderless jihadists, inspired but not directed by al Qaeda: The Dutch Hofstad Network (one of whose members murdered the film maker Theo van Gogh) and the people who carried out the 2004 Madrid train bombings.
One of the biggest problems in countering the leaderless jihad is the vast pool of Muslims who detest the United States. How big is that pool? Earlier this year, the Gallup organization published the results of what it described as the largest-ever survey of Muslims. It found that the vast majority of the world’s 1.3 billion Muslims condemn violence against civilians.
But 7% hate the United States so deeply that they consider the September 11 attacks “completely justified.” Seven% translates into 91 million people. According to Mr. Sageman, “withdrawal from Iraq is a necessary condition for diminishing the sense of moral outrage that Muslims feel.”
It would also be good for the economy.
(Bernd Debusmann is a columnist at Reuters.)
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