Despite recent Dubai concerns and the moderate flight to safety in the US dollar, the currency remains near 15-month lows versus the euro. The weakness stems mainly from the US’ extraordinarily high debt level, $12 trillion or “12, followed by 12 zeros,” according to the Telegraph. There are numerous other reasons the Telegraph covers as to why the dollar is getting hammered, from excess money printing to the ultra-low interest rate. However, what’s most useful is the description of two ways in which the dollar is likely to be at the root of whatever crisis emerges next…
“… the state of the dollar poses enormous dangers. For one thing, America’s currency depreciation trick could backfire if ‘the rope slips’ and a steadily dollar decline turns into free fall. The cost of US imports would soar, with the Fed being forced to sharply push up rates. The world’s largest economy would then be caught in a stagflation trap – a slump, but with high inflation.
“A more immediate concern is that a blind rush into the US currency could cause the carry-trade to go badly wrong – with those who’ve borrowed in dollars suddenly owing more, while their dollar-funded investments elsewhere are worth less.
“A rapid ‘unwinding’ could cause major losses at financial institutions, posing renewed systemic dangers. Far from being a safe haven, the dollar is the likely source of the next financial crisis.”
The full content is available from the Telegraph in its article on how neglect may turn the dollar from a safe haven asset into dangerous place to be.