The selling of the US dollar - a USD currency crisis within the next 3mths.

In July 2009 I wrote a blog post titled Coming risk aversion Q3 - Will the USD be a haven? outlining the analysis that the US dollar may not gain strength in the last quarters of 2009. This of course is counter when the market becomes risk averse as the markets dump risky assets and move back into low yielding currencies and other assets (such as the USD). My analysis has been correct as the US dollar has not gained on any risk aversion exposure, as stock markets continue to rally and a degree of immunity to adverse news and economies have stabilized.

But the obvious aspect of a declining USD is the fact, now a market consensus, that a 0% yield on USD dollars mean very little if any desire for investors to buy the USD. So with limited value and paying no interest the markets begins to speculate, as it is doing currently, this then can be seen in stock market rallies.

So with stock markets now become re-inflated bubbles, the broader global economy also now has to grapple with a declining USD. Since the USD is a base currency of the world it is decline is causing imbalances in other economies, this all when the global economy after it's massive decline in productivity and output in the last quarter of 2008 faces now not only trade imbalances from various countries, but synchronized global (fiscal) deficits in every economy. Which means that economies now are desperate trying to realign their economies and stabilize growth (trade and accounts). The question is after one of the biggest slides in the history of capitalism; are countries capable of stabilizing and growing their economies with massive deficits and trade imbalances? The answer is no. In fact the exports markets of Asia have literally frozen despite some inter-trade between Asian countries, the main consumer of Asian products is the US and the consumer in America is struggling. This has reverberated back to Asia and caused massive export declines in both Japan and China.



The currencies gains that have been against the US dollar have been from the commodity producing countries namely the Australian Dollar (AUD), Canadian dollar (CAD) Brazilian (Real), Argentina Peso and the New Zealand Dollar (NZD). This would be more so on USD weakness rather than output gains on exports, refer to the post China's beat down of Australia - it's all about business.
A down side from USD weakness which cannot be ignored, is it drives up other higher yield risk currencies, namely the commodity producing currencies. With a weakened global economy high prices for exports is not desirable, as the buyer is looking for a cheaper deal, since their (buyer's) economy has yet to return to financial strength.

Undoubtedly we are going to see some disputes regarding the declining USD, more so from China, Middle east (Oil producers) and South America.

The fear is a currency crisis in which the USD collapses through it's support of 70.79 (March 1st 2008 low). This may spark intervention by central banks, or a coordinated devaluation of high yielding currencies (which may happen anyway to protect their exports)

Refer to graph, note the support at 70.79
Rapid selling in September 2009 would indicated that most FX (foreign exchange) long positions have been closed off - so a collapse has already begun. Unless there are some near term net buyers of USD. The March 2008 support could be broken within the next 3mths.