Dollar dilemma
Financial Times
Published: January 25 2005 02:00 | Last updated: January 25 2005 02:00
The fate of the dollar rests in the hands of a handful of central bankers in
A new survey suggests that central bankers are beginning to ponder whether it is in their interest to carry on buying dollars. This does not signal a rush for the exits. Much of the rise in the share of reserves held in euros is a valuation effect. Two-thirds say they want to keep the proportion in dollars unchanged this year. Neither
It would be surprising if central bankers were not thinking very carefully about what they should be doing. The fall in the dollar has already resulted in big capital losses for those holding large dollar reserves. They risk far bigger losses if the so-far steady decline turns into a rout. The importance of capital loss increases as reserves rise relative to gross domestic product. For example,
Could a country with a de facto dollar peg diversify its reserves without appreciating against the dollar? Many assume not. In fact the answer, as so often in international economics, depends on whether the country in question is "small" or "large" in this context. A "small country" with medium-sized reserves, such as
A "large country" -
The Prudent Investor says
This “Armageddon” scenario precisely is what I am afraid of. For the Editorial of the Financial Times, which is a mainstream business outfit, to raise this concern simply reflects the gravity of the imbalances. In other words, in the spectrum of risks, this is not an improbable event. This also implies that in such a case where the Central Bank does ‘lose control over money supply’ means that there could be that risk of a ‘crash’ in the US Dollar based currency system. And as to what money system, in its aftermath, the world will adopt remains virtually uncertain. Yet history has shown that under these circumstances, tangible assets will most likely preside as the transition. Hence precious metals today serve as two purposes, one as commodities and most importantly, as an insurance. Profit from folly and not be a part of it!
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