I'd Buy That For A Dollar

More and more countries are diversifying away from the U.S. dollar in currency reserves, and that spells nothing but bad news for an already weak greenback.

Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”

Let's stop and run that back. The dollar has lost more than 10% of its value worldwide in just six months. There's no sign of a recovery in the dollar, either. If anything, the dollar's weakness is driving investors into commodities like gold and oil.

Saying that the Obama administration is willing to tolerate dollar weakness to boost exports is complete garbage. The US is a mass importer, having a huge trade imbalance. We still import nearly everything in the finished goods department because we've gutted our manufacturing capability and ceded it to Asia. A ten percent hit to the dolor every six months will help with the trade imbalance, but it will do so by sharply lowering America's standard of living.