The Motley Fool Discussion Boards
Investing/Strategies / Bonds & Fixed Income Investments
|Subject: Re: “The End of Dollar Hegemony”||Date: 2/28/2006 11:04 AM|
|Author: jackcrow||Number: 15585 of 35806|
I tried to post this early on this thread and my "New and improved" browser had some hiccups I had yet to figure out.
IMHO the prolification of the USD is tied more to our Treasury market and thus our national debt, economic strength and the taxing power supported by that strength. When I consider the situation carefully I agree that some nations move to the Euro is less a sign of the strength and stability of the the Euro and more a way to "stick it" to the the US. I truly poor reason to make a significant economic change. The characterstics of the EU and EU debt fortunatly don't make it a horrible choice.
The US treasury market has greater transperancy, greater liquidity, greater deapth and breadth then any other securities market. Much international trade is based on the USD in the form of treasuries, they act more as the currency then direct dollar for Xcurrency exchange then any other vehicle. Their value is known with great certainty and clarity.
The Euro, on the other hand, is a confederacy currency. As such the politics behind it our less clean and clear cut; as frightening as that may seem. The faith in the Euro central banks does not compare to the faith the international market has in our central banking system, complete with its warts.
Nations may try to shift some comodities, like oil, pricing to Euros but when the 800lbs gorilla doesn't want to move its very hard to make it; I expect dual pricing will reign for a long time. Even if they succeed in the shift what "real" harm does it do to the strength of the USD and more importantly the US treasury market? Currency exchanges between two predominatly stable currencies has little friction when conducted on a huge scale. And it doesn't change the shear utility of the US debt and the US treasury market for international commerce.
The shift may push Euro backed debt instruments prices up in a statistically noticeable fashion. If so then we can expect a statisticaly measurable shift down in the price of US treasuries. But the fundementals of the markets will continue to dominate how the securities are traded. IMHO neither move will dramaticly change international commerce as we know it. Nor will the changes "hurt" either currency or debt.
US debt = GB debt = Euro debt all are predominatly stable debt markets but the latter two do not compare in liquidiy, transperancy, depth and breadth.
China remains somewhat xenophobic in its international relations and manages its debt and currency issues accordingly. China and India may be the next nexi of international economic growth but they do not have stability nor do they have equal natural resources of the US. IMHO real long term threats would come from a stable and united: Africa, South America or the former Soviet blocks. They have the people and the resources to unseat US supremacy in the international markets.
In order for that to occur they would have to A)Unite in a long term politically stable fashion, B)unseat the 800lbs and 600lbs gorillas currently occupying those seats. The transition, if it occurs, will be slow.
The EU is currently the most viable competitor but it carries many of the same systemic issues of the US. The two, when economic power shifts, will shift together. The EU is an unlikely candidate to unseat the US in dominace of international market issues. It may grow to be a co-conspiritor but the two are too closely linked in methodology and by culture. It will take a significant paradigm shift to move away from current long held, deaply seated practices(habits may be a better word if we define it as many philosophers have).
This doesn't mean that the USD's international value isn't flexible or that there isn't potential for significant downside risk with the USD. That is a market driven issue. There are market forces lurking that if they come to fruition can devalue the USD within the international currency market. Historically the USD has moved around $1.20 = Euro(or a basket of european currencies)as a center point. Market forces may create a secular shift that moves that center against t