Are Iran, Russia, China Behind Dollar's Free-Fall? - 2007

With the weakening of the US Dollar worldwide the following financial analysis are very significant indeed. If Tehran starts a concerted effort of moving away from using US currency (a strategic concept that has been talked about by various major powers looking to undermine US power) it is conceivable that Russia, China and various other nations may follow suit eventually. Needless to say, such a move can potentially have a devastating impact on an already vulnerable US economy. As a result, I believe that US policy makers will attempt everything in their power to foil such an attempt before it takes shape. Consequently, this may result in drastic reverses in Washington DC's foreign policy formulations or may simply result in major military confrontation that will seek to destroy the regime that first attempts to undermine the All Mighty Dollar.

Arevordi

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Are Iran, Russia, China Behind Dollar's Free-Fall?

Some see 'Currency Cold War' meant to bring U.S. to its knees

2007

The hottest selling book in China right now is called "Currency Wars," which makes the case that the U.S. Federal Reserve is a puppet of the Rothschilds banking dynasty and it has persuaded some top officials Beijing should resist America's demands to appreciate its own undervalued currency, the yuan. This might not be news of concern to most Americans if the U.S. dollar were not in precipitous free-fall, having reached record lows against the euro yesterday. What would it mean if China ever threw its economic weight around by dumping dollars in a major way? Suffice it to say it is referred to in some quarters as China's financial "nuclear option," because it would be the economic equivalent of detonating a thermonuclear weapon in the world's financial markets. But the American dollar's fate is hardly in the hands of the Chinese alone. Other foreign parties suspected of participating in a new "Currency Cold War" are Iran, Russia and Venezuela. Diane Francis, a financial reporter for the National Post in Canada, says it plainly and boldly: "There is a Currency Cold War being waged by Russia, Iran and various allies such as Venezuela."

The grand strategy being engineered by Vladimir Putin, she writes, is to force the use of euros as the international monetary standard as a transition to the Russian ruble. "This is simply a monetary version of the old Cold War, minus the missiles," she writes. Experts don't see any short-term reprieve for the falling value of the dollar. Kathy Lien, chief currency strategist with DailyFX.com in the US, told Bloomberg she expects the American dollar to slide even further, forcing more lending rates cuts in the U.S. to stave off recession. "It seems like every single passing day we have a new record low in the dollar, and a new record high in the euro, and it's driven by the fact that U.S. data is continuing to deteriorate," she said. If other nations do not follow the U.S. in cutting rates, the slide in the value of the dollar would most likely continue. If the dollar trend continues spiraling downward, the risk is that nations like China – or Japan or Saudi Arabia – which have been buying U.S. Treasury bonds and thereby funding America's deficit, would stop that practice.

That would be the nuclear option. China, with $1.3 trillion in foreign exchange reserves as a result of the massive and growing $260 billion U.S. trade deficit, has taken huge losses with the falling dollar, given that some 80 percent of China's $1.3 trillion in foreign reserves is held in U.S. dollar assets, largely in U.S. treasury securities. Meanwhile, Song Hongbing, the author of China's runaway bestseller, "The Currency Wars," says he's pleasantly surprised at the 200,000 copies his book has sold. He is probably not eager to see the dollar punished as he lives in Washington, D.C. "I never imagined it could be so hot and that top leaders would be reading it," he says during a book tour in Shanghai. "People in China are nervous about what's going on in financial markets, but they don't know how to handle the real dangers. This book gives them some ideas." Among the research findings that shocked him most was that the Fed is a privately owned and run bank. "I just never imagined a central bank could be a private body."

Some, meanwhile, are standing on the sidelines cheering the currency wars – seeing them as a way of reducing the power and influence of the "imperialistic" U.S. Rohini Hensman, who describes himself as "independent scholar, writer and activist based in India and Sri Lanka," says it's about time the U.S. got its comeuppance. "As the bombs started falling on Iraq in 2003, I wrote and circulated an appeal entitled 'Boycott the Dollar to Stop the War!,' arguing that although the military strength of the U.S. was enormous, its economy was in a mess; with a massive gross national debt, the only reason it could finance its foreign wars and occupations was because of the inflow of over a billion dollars a day from countries accumulating foreign exchange reserves in dollars because it was the world's sole reserve currency. The denomination of the oil trade in dollars made it additionally desirable.

With the advent of the euro, however, there was the possibility of an alternative world currency; therefore individuals, institutions and countries opposed to the war on Iraq should refuse to accumulate dollars or use them outside the U.S., because these were activities that helped to finance U.S.-Israeli aggression against Palestinians, Iraqis and Afghanis. After the World Social Forum meeting in 2004, the Boycott Bush Campaign adopted the dollar boycott as part of its strategy." In early trading today, the dollar advanced slightly, prompting gold prices back from 28-year highs set yesterday. The dollar's value against a basket of six major currencies rose slightly to 77.950 from a lifetime low of 77.657 a day earlier. The dollar traded at $1.4223 per euro, stronger than a record low on Monday of $1.4283. WND has reported the Federal Reserve is in a dilemma.

The stock market has demanded rate cuts, wanting to return to the free credit policies of the Federal Reserve that fueled the liquidity bubble that has boosted home prices and pumped the Dow Jones Industrial Average since 9/11. Yet, the Fed giving in to stock market demands and lowering rates threatens an international dollar sell-off that could lead to a dollar collapse. Former Fed Reserve Chairman Alan Greenspan also sparked controversy by suggesting in his recently published book, "The Age of Turbulence," the euro is rivaling the dollar as the international foreign exchange reserve currency of choice. The Wall Street Journal recently quoted a rule of thumb advanced by Harvard University economist Kenneth Rogoff, a former chief economist for the International Monetary Fund. According to Rogoff’s "back-of-the-envelope" calculation, a 20 percent drop in the dollar's exchange value reduces Americans' income by 3 percent, adjusted by inflation.

Source: http://www.wnd.com/news/article.asp?ARTICLE_ID=57936

In related news:

The Almighty Ruble


The ruble got no respect. During the cold war, it symbolized the backward Soviet economy. After the U.S.S.R. collapsed, it was an avatar of instability. Even plumbers in Moscow often preferred to be paid in bottles of vodka rather than rubles — the bottles did not lose their value. No more. Lifted by high oil prices and a wave of foreign investment, the once humble ruble is showing its muscle, and fueling a consumer boom. After gaining 20 percent in value against the dollar in the last few years, the ruble is even starting to displace the greenback as Russians’ currency of choice for both saving and spending. As the ruble increases in value — not just against the dollar, but against brawnier currencies, too, like the euro — imported goods are becoming cheaper for Russian consumers. Now ruble notes, once handed over by the fistful for a loaf of bread, are being used to purchase Mercedeses, flat-screen televisions and European beach vacations. Of course, the party could be short-lived. Russia takes in roughly $530 million a day from oil, its most lucrative export. If the price of oil declines, so will the ruble. And even if the price of oil does not fall, an oil-fueled boom brings dangers of its own. In many countries, an over-reliance on petrodollars has led to underinvestment in businesses outside oil and gas, and a subsequent withering of other domestic industries. To deal with such downsides of the ruble’s rise, Russia is salting away oil money in a rainy day fund, called the Stabilization Fund, which holds more than $120 billion. In January, Moscow will split it into two funds: the Reserve Fund and the Fund of National Prosperity, the latter intended for state investments.

Together with the Central Bank of Russia’s foreign reserves, Russian authorities have a currency reserve of $413 billion, the largest per capita foreign currency reserve of any major economy, including China’s. In an oil downturn, authorities could spend that reserve to protect the ruble. In the meantime, the reserve adds an aura of stability to the economy for investors. “Excluding a couple of oil countries where the money belongs to the local ruling family, which is something different, Russia has surpassed all the newly industrializing Asian countries,” in foreign currency reserves, Kenneth S. Rogoff, an economics professor at Harvard, said in a telephone interview. Analysts say Russia’s underlying fundamentals are good, too. First, oil exports are not the sole source of the ruble’s rise. That was the case before 2007, but now foreign investment has become a significant factor. Private capital flows into Russia increased roughly 360 percent in the first six months of this year, compared with the same period last year. Only about 30 percent is attributable to oil and other extractive industries, according to the State Statistics Committee. Analysts also point to what they call Russia’s sound macroeconomics. President Vladimir V. Putin’s government has managed inflation, though certainly not eliminated it. And through its tight control over politics and society, the regime has kept demands for social spending in check — a leadership approach reminiscent of the authoritarian “Asian model” of economic development.

But economists also say a long-term cycle of economic depression and recovery is bolstering the ruble, at least for now. Starting in 1990, the year the Soviet Union collapsed, Russia’s economy contracted by as much as 40 percent. This year, for the first time since, Russia’s gross domestic product returned to 1990 levels: factories, oil pipelines, roads, ports and other facilities that once were idled are operating near full capacity. In the decade from January 1993 to Dec. 31, 2002, the ruble’s lowest point, the dollar appreciated 7,664 percent against the ruble, rising to 31.96 rubles to the dollar. On Tuesday, one dollar bought 25.47 rubles, a 20 percent appreciation for the ruble. Even more important, as measured by purchasing power parity, a gauge of a currency’s value based on the goods it can buy, a dollar should buy roughly 15 rubles today, according to a report Merrill Lynch issued in July. By that measure, the ruble remains the world’s second-most undervalued major currency, behind only the Chinese yuan, whose value has given policy makers in Washington headaches. Indeed, the ruble would be even more valuable today if not for the Russian central bank intervening to keep it from rising more. Through much of the 1990s, Russia suffered the opposite problem. Then the ruble, shunned by locals and tourists alike, was propped up by Western lending. It collapsed in 1998, on the heels of the Asian economic crisis. Russians’ life savings evaporated and poverty became widespread. In just one example, the theft of manhole covers became a major problem. Russians were stealing them to sell for scrap metal.

All that is different now. The current consumer boom has sparked renewed interest in Russia from companies like Wal-Mart and Starbucks. Indeed, shares in grocery stores, electronic retailers and other consumer-sector companies are outperforming Russian oil companies on the Moscow stock exchange. Russian banks offer accounts in rubles, dollars or euros. Of the three, ruble accounts are attracting the most funds. Ruble-denominated personal savings accounts rose 6.8 percent in the first quarter of 2007, while foreign currency accounts were level, according to a report by Goldman Sachs. That has led to some, perhaps predictable, gloating. Recently, a pro-Kremlin youth group staged a mock panhandling to benefit the United States currency. They held out hats for passers-by to make donations — “raising money for the dollar’s ticket back home,” their signs read. But there are limits as to how far a currency can carry a country. Real economic growth, economists say, will depend on continuing foreign investment. Without it, Russian consumption of imported goods will outpace earnings from oil by 2010, according to Russia’s finance minister, Aleksei L. Kudrin.

If that happens, Russia’s economy will depend on foreign investment to maintain the strong ruble and the rising living standards associated with it — much as the United States does, but without the same record of stability. Last summer, authorities eliminated all restrictions on ruble trading, making the currency fully convertible and easing the way for the capital inflow needed to meet the demand. In the first six months of this year, net private capital inflow into Russia was $67.1 billion — more than during the entire first decade after the collapse of the Soviet Union. In the same period last year, capital inflow was $14.5 billion. While threats of nationalization persist in the oil sector, investors have largely decided that they are acceptable considering the money to be made. In another recent sign of the ruble’s strength, a particularly Russian enterprise has just become more expensive. Russia has raised the price for a tourist flight to the International Space Station aboard a Russian rocket. What cost Dennis A. Tito, the first space tourist, $20 million in 2001, this year cost the former Microsoft executive Charles Simonyi $25 million. Citing the strong ruble, Russian space agency officials say they will increase that fee to $30 million.

Source: http://www.nytimes.com/2007/08/08/bu...=worldbusiness

Iran: Almost Dollar-Free

Summary

Iran is trumpeting its success at shifting away from the use of dollars in its oil trade. Such a shift is not easy, and generates little but costs.

Analysis

Mohammad-Ali Khatibi, an executive in Iran's National Iranian Oil Co., said Oct. 2 that after two years of effort, Iran uses the U.S. dollar in only 15 percent of its oil transactions, with 20 percent being carried out in Japanese yen and 65 percent in euros. Insisting upon non-dollar payment really only creates rhetorical ammunition. So long as the global system -- and the energy industry in particular -- is dollar-denominated, any non-dollar payments for oil subtract the exchange rate costs from the payments. Put simply, Iran's insistence on anything but dollars translates into a small transaction fee loss on every oil sale.

So while Iran can stand proud and bite its thumb at Washington, proud that it has played a small role in reducing demand for the dollar and thus making the currency slightly weaker, the process racks up a hardly inconsequential cost. In the first quarter of 2007, a 1 percent transaction cost would have cost Iran $500 million, a significant sum for a country wracked by inflation and dropping living standards. Once the payments are done, keeping the proceeds in non-dollar currencies could make more sense. For the past few years the U.S. dollar has been weakening, so the relative value of non-dollar holdings has gradually increased. Such logic is more obvious for euros, where gains have been impressive, than for the yen, whose real appreciation has been only marginal.

But the dollar's weakness does not work against U.S. economic strength, and going dollar-free is hardly risk-free. First, a weak dollar is allowing U.S. firms to surge exports, generating strong growth at a time when a more traditional element of economic growth -- the housing market -- seems to be stumbling. Iran's diversification does push the dollar down a touch, thus doing the United States a small favor -- which could be why the Bush administration is ignoring Iran's currency rhetoric. Moreover, other and larger forces are at work in weakening the U.S. dollar. Foreign governments, including the United Arab Emirates and Russia, continue to shift increasing proportions of their currency reserves away from the dollar. When advisers to the Chinese government suggested in August that Beijing could threaten to sell off chunks of its U.S. assets as a "bargaining chip," analysts and economists jumped on it as a possible explanation for the dollar's subsequent decline.

Currencies rise and fall on a mix of factors, and one of the biggest factors leading to the dollar's fall is likely petering out. When the Europeans launched the euro in 1998, central banks the world over were not sure that it would last, so they took nearly all of their francs, lira and deutschemarks and traded them in for greenbacks. The result was a surge in the U.S. dollar that peaked in 2000-2001. Since then, central banks -- now confident that the euro is here to stay -- started switching back. Six years later a new balance is being achieved, and that is likely to put a floor under the dollar sometime in 2008.

Source: http://www.stratfor.com/products/pre...ected=Analyses

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