In 1966 one US dollar was worth four Swiss francs. In the last forty years the dollar has lost over 75% of its value against the franc. Forex traders could stand to gain from shorting the dollar as the Chinese intend to start their renminbi oil futures exchange in Shanghai in February. The petrodollar is going to have some competition thanks to the petroyuan.
It is now obvious that the PBoC is going to compete with the Fed by trying to make the renminbi an important international reserve currency. There is, however, the problem of over US$ 1.1 trillion in Treasuries currently held by the Chinese. Should the dollar depreciate quickly, the value of that paper would decrease accordingly. At the same time rapid appreciation of the Chinese currency would cause problems for Chinese export industries.
A few figures will serve to illustrate the situation. US debt is now at 21.6 trillion with a foreseeable budget deficit of around 650 billion. Add to that a negative trade balance of 798 billion, of which 376 billion is with China alone (US Debt Clock). It would be counterproductive for the Chinese to bring about a rapid depreciation of the dollar as they would be damaging themselves.
There is another consideration, namely, the large amounts of oil that China imports. As mentioned above, the oil futures exchange in Shanghai will soon start. One can reckon that Russia and Iran will participate right away but that many other countries and traders will not. The Chinese will start putting pressure on other countries and traders gradually so as not to cause a dollar rout. The exact content of discussions between the Chinese and Saudis concerning oil is not known, but they will certainly be trying to work out an agreement. The timing is important.
Just how much capital will be repatriated by American international companies because of the new tax law lowering corporate tax is difficult to estimate. The dollar may even gain strength due to the money flow in the direction of the States. Such an infusion of funds may contribute to a further surge in the stock market as companies engage in extensive stock buyback programmes. Judging from recent trends, it can be doubted that US capital expenditure will benefit tremendously from lower taxes.
Given that academicians have shown that excessive debt slows growth, American budget deficits will most probably increase markedly over the next decade. With interest rates rising due to factors beyond the control of the Fed, the government will have difficulty in servicing the debt. In conclusion it looks like further dollar depreciation can be expected. Will the dollar lose another 75% ?
This Newsletter has been prepared by WWS Swiss Financial Consulting SA (the company). Even though every effort has been taken to ensure the accuracy of the content of the Newsletter, there is absolutely no guarantee that the information contained in it is correct, up-to-date, accurate or otherwise applicable. It is not intended as a solicitation, invitation or recommendation for the purchase or sale of any investment fund or product or security or financial instrument or to participate in any particular trading strategy or banking product in any jurisdiction. It is not to be distributed in any country or area where it is legally prohibited. No liability whatsoever is or will be assumed by the company for any damage, loss or negative result of any sort ensuing from following views expressed and contained in the Newsletter. Investors themselves assume the full risk for any decisions that they take (caveat emptor). The Newsletter may not be reproduced or published by anyone anywhere in any way or form without the express written permission of the company.
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