Over the past few months it has been no small secret that the dollar is plunging at historic rates. The dollar is at its lowest 10 yr rate against the Indian Rupee. And against many other currencies too.
The dollar fell the most since September against the currencies of its six biggest trading partners after Chinese officials signaled plans to diversify the nation’s $1.43 trillion of foreign exchange reserves. The dollar fell against all 16 of the most-active currencies, declining to the weakest versus the Canadian dollar since the end of a fixed exchange rate in 1950, a 26-year low against the pound and a 23-year low versus the Australian dollar. [link]
The falling dollar does not bode well for the Indian outsourcing juggernaut. If Indian companies are getting paid in dollars, they are worth much less than what they were at the start of the year.
The Chinese who are sitting on a mountain of US trade deficit, hold a lot of power over the dollar. They are getting ready to switch some of their reserves to other currencies.
“We will favor stronger currencies over weaker ones, and will readjust accordingly,” Cheng Siwei, vice chairman of China’s National People’s Congress, told a conference in Beijing. The dollar is “losing its status as the world currency,” Xu Jian, a central bank vice director, said at the same meeting.
However it is ironical that the communist country keeps its own currency under wraps and not at market value so that it can artificially inflate/deflate its reserves. How about China actually opening up its currency for the first time.
On second thoughts (and I’m no economist) what happens if the US defaults on its reserves and asks China to take a walk. Then all China would be left with is paper money or rather money on paper. Now that would be a scenario I would love to see played out.