The U.S. dollar has been on a bit of a volatile tear lately. First, China suggests that the world should have a global reserve currency independent of a specific country-based currency.
In other words, it was saying it wanted to drop the dollar as the world’s reserve currency, though it stopped just short of saying it outright.
Interestingly, U.S. Treasury Secretary Tim Geithner responded favorably to the Chinese proposal, which sent the U.S. dollar spinning.
Here’s where things got sticky, and Tim “The Tool Man” Geithner got it wrong, and was forced to clarify his comments.
The Tool Man issued a statement without ever having read People’s Bank of China Governor Zhou Xiaochuan’s proposal. What the media heard was that China wanted the U.S. dollar replaced with an international reserve currency.
And what Geithner said was he was open to the proposal.
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What wasn’t said initially was this: The Chinese proposal was for a widening of the International Monetary Fund’s special drawing rights.
“The special drawing rights are currency units valued against a composite of currencies,” notes Ye Xie and Oliver Biggadike of Bloomberg.
In other words, they are a basket of currencies of which the U.S. dollar holds the biggest weight. That means an expansion of these rights would make the U.S. dollar less weighty.
That’s why when Geithner said he was open to the proposal, the U.S. dollar declined 0.7% that morning. And that’s why he was asked to clarify his remarks today.
Here was his response:
“The dollar remains the world’s dominant reserve currency. I think that’s likely to continue for a long period of time. As a country we will do what is necessary to make sure we’re sustaining confidence in our financial markets and in this economy’s long-term fundamentals.”
But at the same time, he remains open to expanding the IMF’s special drawing rights.
Geither is walking a fine line between supporting the U.S. dollar and accommodating the Chinese. China holds massive reserves in U.S. dollars – the largest in the world, and Geither says he’s tremendously respectful of that fact.
With conflicting statements like this, the dollar will continue to dance.
But for how long? The dollar will become increasingly tired as it’s forced to bear the weight of Geithner’s bailout plan. Or is it plans?
Christian DeHaemer, editor of Crisis Trader, notes, “Here’s how I add it up. There’s the original TARP – $1 trillion; the Fed short-term window tossed open to all comers – $1trillion; the recent Fed TALF – $1 trillion. Plus this new toxic asset plan’s $1 trillion. Plus the 2010 Obama budget, which is another $1 trillion increase… Five trillion is roughly 36.2% of 2008 U.S. Gross Domestic Product of $13.8 trillion. And GDP will be a lot less in 2009, which will put U.S. debt at closer to 50% of GDP.”
And what does that do to the dollar?
“This has put the U.S. dollar in a tenuous place,” Christian writes. “And since all other currencies are in similar scenarios, hard coinage such as gold is looking as a place to store wealth. No one knows for sure, but in any event, if gold speculation ramps up to fever levels, which I expect, small cap gold companies will have the most upside.”
Crisis Trader has recommended several small cap gold companies, and Chris reports, “We have four in our portfolio that have done extremely well.”
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