Tags: dollar | US | reserve | currency

Going, Going, Gone . . . (U.S. Dollar)

Wednesday, 23 Oct 2013 08:03 AM

By Ashish Advani

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This is the beginning of another major leg down for the U.S. dollar.

The U.S. economy is only just beginning to coming back from the brink of financial disaster, which would have been unleashed had the United States defaulted on its debt obligations.

The challenge it now faces is one of credibility and responsibility. The United States policymakers have not acted as though the dollar is the reserve currency of the world. The very public spat between the two warring factions (Tea Party and Republicans) is beginning to spill over and this makes the interaction between the Democrats and the Republicans rockier.

The public dispute has really damaged and tarnished the reputation (if we had a good one to start with) of the United States as a true fiscally responsible leader worthy of holding the crown of the reserve currency. Leadership comes with responsibilities and we certainly proved to the world that we are akin to two toddlers fighting over a pacifier.

The first time the two sides dueled over this back in August 2011, we ended up with sequestration and a downgrade. The dollar tanked right after that as the world woke up to the fact that the dollar is not invincible. Moving along that timeline, the two sides could not agree to a compromise and the sequester went into effect. Despite dire warnings, they did not agree and decided to hurt the economy and jobs.

Deja vu occurred this time, as the two sides once again showed they cannot work with each other and we now have three months to create another Frankenstein-style deal, which we will all regret again later. It seems like history has not yet taught the two sides to play chicken with the world's fate hanging in balance.

China has had it with the United States and has been diligently working on dethroning the U.S. dollar for years. As it makes steady progress, it has now signed up the eurozone and the United Kingdom as trading partners, adding to a now very long list of partners who will trade in non-U.S. dollar terms. These moves are deliberate and intended to cut off the roots that hold the U.S. dollar as the reserve currency.

Gold has jumped up by about $100 in the past week or two. The euro is knocking on the doors of 1.38 against the dollar. Jobs created are beginning to weaken; surveys show that people in the United States will spend less over the holidays; tapering was pulled back as interest rates jumped up too fast, strangling the fledgling housing markets; and industrial growth is anemic at best.

This is not the picture of strength and stability that should be commanded by a reserve currency or leader of the global world.

Diversifying into non-U.S. dollar investments and commodities is the only ticket that will save your precious investments. That is the mantra to long-term preservation of wealth.

On a short-term tactical move, investments in emerging markets will pay off for the next three to four months. I would buy currencies of the emerging markets and invest in the stock markets for next three months to reap extraordinary gains.

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