Wednesday, November 28, 2007

Iran, Venzuela, Warren Buffet, Taj Mahal & supermodels - and US$

Of course, anyone following the global financial news will know that the 50-year old global romance with US$ is coming to an end... The signs were there since quite some time...

What has changed is that what could be earlier explained as a geo-political or high-end financial investor pheonomenon, is now trickling down to mundane affairs.

The snap-shots of this worn-out/wearing-out romance look like this:

1. Earlier, it was the Communists/"Axis of Terror" countries, who started terminating the relationship
E.g.,

  • In Nov 2000, Iraq - with world's 2nd largest oil reserves - switched from US$ to Euro in its oil trade (and consequently, got liberated/invaded!)

  • In Nov 2004, Cuba banned trasactions in US$ and switched to Euro

  • In May 2006, the Russian Finance Minister, Alexei Kudrin, described US$ as an "unreliable as a reserve currency". Russia has been selling oil in Euros since last 4-5 years.

  • In Nov 2007, in the OPEC meeing Iran's President Mahmoud Ahmadinejad said that US$ has become a "worthless piece of paper"... Since 2003, in any case, Iran had started demanding to be paid in Euro for oil - and had thus became a part of "axis of evil" country>...

  • and of course Venezuela... along with Sudan, South Korea, China, etc.
    etc., etc..

    2. Then, the financially-savvy investors started moving away
    E.g.,
  • Two years back, in the World Economic Forum, Microsoft Chairman Bill Gates publicly dumped the US$: "I'm short the dollar... The ol' dollar, its gonna go down."

  • Warren Buffet echoed Bill Gates sentiments then, and again noted this year: "We still are negative on the dollar relative to most major currencies, so we bought stocks in companies that earn their money in other currencies".

  • Peter Schiff, president of Euro Pacific Capital described: "The dollaris a basket case"

  • Investor Jim Rogers, a former partner of George Soros, of Rogers Holdings (formerly Beeland Interests Inc.) advised people to get out of dollar: "If you have dollars, I urge you to get out... That's not a currency to own." In fact, he is following his own advise by selling his property in dollars to buy Yuan, and expects that he will be able to get rid of all his dollar assets by next summer
    etc. etc...

    3. The friendly countries/allies start bidding farewells
    One can dismiss the above since countries like Cuba, Iran or Venezuela have a political point to make against US. And investors, at best, would be following their self-interest - they would move away from a weak dollar and come back once the dollar picks up.

    But more recently, even the friendly countries are getting disenchanted with US$
    E.g.,
  • In May this year, Kuwait stopped pegging its currency, the dinar, to the US$. This was not out of any animosity against US; it was just two expensive for Kuwait to keep the dinar linked to the dollar.

  • In August, US Treasury showed outflows of $163bn from all forms of US investments. This was the first time since 1998 that on balance the foreigners sold the US Treasuries. Japan and China led a record withdrawl of foreign funds - followed by Taiwan.

  • In October this year, the Qatari and Vietnamese governments announced that they are rapidly divesting in dollar denominated securities. Qatari Prime Minister mentioned that the government-backed $50bn Qatari Investment Authority (QIA) now had less than 40 per cent of its investments in dollars, down from a high two years ago of 99 per cent.

  • In the recently concluded meeting of OPEC heads, a closed door meeting "accidentally" got telecasted to journalists. In response to pressure by Venezuela and Iran to replace US$ by a basket of currency for oil trade, Saud al-Faisal, foreign minister of U.S. ally Saudi Arabia said: "...the mere mention that the OPEC countries are studying the issue of the dollar is itself going to have an impact that endangers the interests of the countries..."... That's why, while the issue was discussed and debated, it did not find mention on the draft declaration.

  • More recently, last week, People's Bank of China vice-director Xu Jian declared the dollar was "losing its status as the world currency." With a dollar-denominted forex of more than a $trillion, this statement may have wider implications.


    4. And now these minor reverberations!
    Nearer home in India, two developments took place during last couple of months.

  • Five-star Hotels such as the Le Meridien, the Taj group and ITC Maurya have switched over to a rupee-tariff regime. The foreign guests are required to pay in INR, and not in US$. Accoriding to the COO of Le Meridien: "The dollar was falling every day for the last couple of months ... decision was taken to charge a single tariff from October"

  • Foreign tourists to about 120 of India's famous historical landmarks (including 27 World Heritage sites, Taj Mahal being one of them) will need to pay the entrance fee in Indian Rupee, and not in US dollar.

    And last but not the least, a news from Brazil:

  • Not that one needs to learn about currency markets from supermodels, but when the 27-year old Gisele Bundchen, the Brazilian supermodel, insisted that she wants to be paid in any other currency, but not US dollars for P&G's Pantene hair product ads, I guess the domino's effect is taking place...


    Related Posts:
  • April 17th, 2003: Gulf War-II: Saving the US$ against Euro
  • December 9th,2004: The Collapseof Dollar Economy??
  • February 3rd, 2005: US$ vs. Bill Gates, Warren Buffet, George Soros, China
  • January 5th, 2007: The Collapse of U$D Economy?? - Part II
  • October 4th, 2007: Tipping Point for US$?

  • 7 comments:

    apoorva said...

    its such an irony...when in this high-tech world you stumble upon such people who can really change your "perspective"........

    i really love the way you concoct and provide us with all the cream information about whts going on in this world.....(where we dwell!!!)

    i have started going through this blog recently n i find it very interesting n a lotttt informative....

    the words and expressions are simply fabulous!!!!

    Madhukar said...

    Thanks, Apoorva,

    in the process of writing these, I have also learnt and changed my "perspective"

    apoorva said...

    hey Madhukar....

    i m a fan of urs...The way you write is simply ausome....

    m eager to know how you got into all these stuffs n this writng process...

    wat do you do....n how you manage to stumble upon such things.....

    i hope answering my questions wont be a trouble for you!!!winking...

    Supratim said...

    So, the dollar goes down as a reserve currency ........ so what?

    How is this beneficial for any of the developing countries?

    I don't know whether you are aware of this but the fiscal conservatives in US have been advocating a weak dollar for years ..... so that exports become cheaper and imports become more expensive.

    Have you considered the capital losses that countries like India and China will suffer if the dollar goes into free-fall? (And, given the secretive way RBI works, we don't even really know how much of our forex deposits are in $) And, the impact on our trade balance?

    While the US will certainly be affected by a weak dollar (increase in borrowing costs for a debt fed economy), no one should think that they will escape the resultant contagion.

    Global recession, here we come ......

    Supratim said...

    Here is an interesting ECONOMIC article on the issue:
    http://www.economist.com/printedition/displayStory.cfm?Story_ID=10208445

    Madhukar said...

    Supratim

    thanks for the link to the Economist article - though frankly, I would not go by it. While there have always been cycles, but this time - as I had noted in some ealier posts on this - the context has changed. For instance, this time when when Federal Reserve reduced the interest rates, Saudi Arab did not do so - for the first time!... UAE is already thinking of de-pegging their currency from US$...and if the common currency which GCC is planning comes up, then US$ is doomed...

    The Economist article focuses only on currency trading without having a clue about the other geo-political happenings..

    Yes, if the US$ loses its global status, as it seems to be happening, then it is not just US which will bear the brunt - all other ventures/countries which relied on US$ will also suffer.. some few in the developing economies like India and China will also be impactec

    as for the advocacy for weaker dollar to boost US exports/economy, the data does not support that. The US$ has been growing weaker since last many years... and yet, the US trade deficit has kept on increasing!

    mrosner said...

    i actually posted about this from a business perspective at http://www.capitalai.com/blog/2008/01/15/taj-mahal-says-rupee-in-dollar-out/