Dollar Breaks Through Resistance

The dollar is once again showing signs of weakness after a brief respite. Until we can find a meaningful bottom in housing the Fed will continue to drop rates and the dollar will struggle to find its footing. If you can make a compelling argument for why the dollar should rebound in the near time I'd love the hear it. Until I am convinced otherwise I will continue to hedge against the increasing inflation risks that accompany a weak dollar. Commodities, TIPS, infrastructure assets and just about anything denominated in emerging market currencies is where I'll be at least for the near future.


The other inevitable effect of a weak dollar is the dollar's dethronement as the world's reserve currency. Slowly but surely it looks like the Euro is becoming the currency of choice for the world's reserves. Brad Setser however cautions us not to take the IMF data we rely on for these numbers to seriously:

I would caution against reading too much into the fall in the dollar's share of global reserves in the latest IMF COFER data release for two reasons:

First, most of the fall in q3 is explained by the rise in the dollar value of the world's existing holdings of euros and pounds. The euro rose from around 1.35 to a bit over 1.42 in the third quarter. The rise in the dollar value of the world's existing holdings of euros from currency moves explains at least $50b of the overall increase in euro holdings.

Second, the diversification that is taking place is coming from the world's advanced economies, not the world's emerging economies. After stripping out valuation gains, the advanced economies added $10.7b euros to their stockpile -- a far larger sum than the $3.1 billion increase in their dollar holdings. Either Japan diversified at the margin or a host of European countries continued to shift away from dollars. Those emerging economies that report data to the IMF, by contrast, bought three times as many dollars ($61.4b) as euros ($21.2b).

If emerging economies that do not report detailed data on the currency composition of their reserves acted like other emerging economies, dollar reserve growth remained very strong -- though not quite as strong as in q1 or q2. Central bank financing of the US hasn't ended.

So while the dollar hasn't fallen from grace just yet, we are surely testing the patience of many policymakers.