Beginning of the end for USD?

Many people have been predicting the demise of the USD for a long time. In fact, many were convinced it was already underway, until the recent slight rebound following the correction in commodities markets. Most believe without the support of big-scale US debt buyers like China and the Gulf states, the USD would have been kaput a long time ago. Question was, how long would these people keep buying something that had every reason to decline over the long run, with no sign of improvement, especially in terms of the country's budget deficits?

See the article below, Bush had to call Hu Jintao to reassure him about the situation. How often does the bloody leader of one of the most hypocritical countries in the world call someone else to explain something?

Hu, Bush talk on financial crisis
(09-22 12:12)
Chinese President Hu Jintao and US President George W Bush spoke by telephone about the financial crisis engulfing Wall Street, China News Service reported.

The state-run news agency said the two leaders spoke at Bush's request.

Hu expressed hope that US government efforts would succeed in stabilising the US financial system, which he said would be in the interests of both the United States and China.

China Investment Corp, the country's US$200 billion (HK$1.56 trillion) sovereign wealth fund, is in talks to increase its stake in Morgan Stanley.

REUTERS

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Anyway, with the announcement of the latest trillion dollar bailouts on Wall Street, it looks like it's the final straw. Remember when the US lectured Asian countries during the Asian financial crisis about the evils of bailouts and the need to raise interest rates to killer levels, so as to allow creative destruction to work its necessary magic on a ruptured economy? Guess they lost their own study notes.

Anyway, China's state-linked papers don't talk without the tacit approval of the central government. With this, it looks like the first shots are being fired. If China starts diversifying out of the USD in a big way, the USD is screwed. If the US retaliates and gets into a trade war with China, it's still screwed. Either way, there's no reason to hold any USD or USD-denominated assets (including those pegged to the USD) for now...

China paper urges new currency order after "financial tsunami"
Wed Sep 17, 2008 1:45am EDT

BEIJING (Reuters) - Threatened by a "financial tsunami," the world must consider building a financial order no longer dependent on the United States, a leading Chinese state newspaper said on Wednesday.

The commentary in the overseas edition of the People's Daily said the collapse of Lehman Brothers Holdings Inc (LEH.P: Quote, Profile, Research, Stock Buzz) "may augur an even larger impending global 'financial tsunami'."

The People's Daily is the official newspaper of China's ruling Communist Party, and the overseas edition is a smaller circulation offshoot of the main paper.

Its pronouncements do not necessarily directly reflect leadership views, but this commentary by a professor at Shanghai's Tongji University suggested considerable official alarm at the strains buckling world financial markets.

China's central bank earlier this week cut its lending rate for the first time in six years, a move analysts said was aimed at bolstering the economy and the battered stock market.

"The eruption of the U.S. sub-prime crisis has exposed massive loopholes in the United States' financial oversight and supervision," writes the commentator, Shi Jianxun.

"The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."

But Vice Premier Wang Qishan, on a visit to the United States, told U.S. trade officials in a meeting on Tuesday that China and the United States needed to maintain close economic ties with global markets going through such turbulence.

"The Chinese government is well aware of the fact that the United States, which is the world's largest developed country, and China, which is the world's largest developing country, should have constructive and cooperative economic and trade relations," he said.

China is a major buyer of U.S. Treasury bonds, and through its sovereign wealth fund it has taken stakes in two large U.S. financial institutions.

In July 2005, China revalued the yuan and freed it from a dollar peg to float within managed bands. But the yuan and China's trade remains tightly linked to the fortunes of the dollar.

The commentary suggested China must brace for grave economic fallout and look to alternatives, saying the crisis brings to mind the Great Depression of the 1930s.

"Lehman Brothers announced bankruptcy will not only have a domino effect on the global financial world, it will bring a shock to the world economy," the front-page comment stated.

(Reporting by Chris Buckley; Editing by Ken Wills)

http://www.reuters.com/article/newsOne/idUSPEK4365020080917?pageNumber=1&virtualBrandChannel=0

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