Friday, 27 February 2009

The relative illusion of USD safety

Like GBP, EUR, CHF & now JPY before it, the USD is bowing under the juxtaposed twin pressures of a strong demand for its currency and horrendous fundamentals (note Obama's forecast for a balooning deficit of $1.75 trillion) . When it cracks what will replace it... gold? The gold bulls would have us believe that in a world of fragile confidence, this is the only true store of value. Whilst any USD weakness is likely to boost gold it may also signify capitulation and the realisation that safety is only relative and not absolute.

However, judging by recent comments by a Chinese official, the US Treasury can count on its best customer, China, to continue to purchase Treasuries, even if the USD does depreciate:

"Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option… We hate you guys. Once you start issuing $1 trillion-$2 trillion… we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."

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