The End of US$ Hegemony - June 16th 2009

This morning I delve into the domain of my esteemed colleague on FX Jack Spitz. We have had numerous conversations on this topic and I suspect many more ahead.

Of late all eyes have been on the FX markets and with good reason; but it has not been the more traditional economic data and drivers that we have generally looked upon; but instead what increasingly looks like a complete paradigm shift.

With the G-8 Ministers meeting this weekend providing rah-rahs and pom-poms for the Greenback and the Finance Ministers of Japan and Russia suggesting faith in the worlds reserve currency for very different reasons, one might question my focus on the end of the hegemony of the Greenback and why this may be the beginning of a paradigm shift that will change the worlds reserve currency.

How can this be?

Currently and for the last number of decades the US way of life and its military spending in particular has been financially sponsored and supported primarily by the Chinese, Japanese and South Koreans, with the Russians in the last few years and the ascent of oil prices, jumping into second place for buying US debt and funding that lifestyle.

We have continually however, and with increased volume of late, heard and read about the concern that's been expressed by these nations, with the exception of Japan and Korea, about the continued depreciation of the USD.

It's a simple matter of observation, seeing the Chinese continually trying (not always successfully) to purchase real and in particular commodity assets with their USD rather than maintain overly large reserves in what is a continually depreciating currency. Recent examples are Chinalco's bid to acquire a stake in Rio Tinto (and despite huge concessions on the part of Chinalco, still a resound failure) and only yesterday Sinopec's bid to acquire Addax Petroleum with a Stg 4.8bn bid.

Over the last number of months the stories/rumours have been numerous on these same creditor countries looking to diversify away from USD and in the last number of weeks we have had stories from not only these creditor countries but also the IMF suggesting use of SDR's (a currency basket of Special Drawing Rights of which the USD is still the largest percentage, though with the Euro and other currencies also making up said basket); add to that Paul Krugman the recent Nobel Laureate in economics suggesting that the GCC should de-peg from the Greenback and the growing cacophony of voices spouting the same notion, demands that attention be paid.

Hence the shellacking that the USD has been faced with of late, as concern grows about the extent of US deficits ($2 trillion and growing) and despite all the talk of a strong dollar policy the evidence that continues to suggest otherwise.

But this week is especially important as the SCO (The Shanghai Cooperation Organization) meet in Yekaterinburg, Russia, (formerly Sverdlovsk) Monday and Tuesday with Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation group. The SCO continues to gain in significance and in the context of the refusal that the US received in its request to attend this meeting, becomes even more significant.

It's quite evident that the primary subject will be what to do about the US dollar as the world reserve currency. China is already establishing the Yuan as the preferred currency in bi-lateral trade agreements and Russian continues to express a similar desire to use the rouble.

I can't help but believe that we might be seeing a landmark moment in history unfurling before our eyes as it speaks to the hegemony of the Greenback as the worlds reserve currency.