Tuesday, November 2, 2010

QE2 May Trigger Full Demise of US Dollar, Out of Control Currency Wars Escalate

From the Telegraph today comes a timely note by Evans-Pritchard warning that the Fed's QE2 risks accelerating the demise of the dollar-based currency system, "perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal "bancor" along lines."

"China's commerce ministry fired an irate broadside against Washington on Monday. "The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market..."

In the meantime, the extremely low US dollar has managed to enable the impossible: the US is now exporting Ethanol to Brazil. That's corn ethanol, the worst possible and inneficient vegetable (food) to make ethanol from. Unthinkable.

The situation is escalating out of control:

"Taiwan intervened on Monday to cap the rise of its currency, while Korea's central bank chief said his country is eyeing capital controls as part of its "toolkit" to stem the flood of Fed-created money leaking out of the US and sloshing into Asia. Brazil has just imposed a 2pc tax on inflows into both bonds and equities – understandably, since the real has risen by 35pc against the dollar this year and the country has a current account deficit."

"The innocent bystanders caught in the crossfire of Fed policy are poor countries such as India, where primary goods make up 60pc of the price index and food inflation is now running at 14pc. It is hard to gauge the impact of a falling dollar on commodities, but the pattern in mid-2008 was that it led to oil, metal, and grain price rises with multiple leverage. The core victims were the poorest food-importing countries in Africa and South Asia. Tell them that QE2 brings good news. "

He forgets Brazil, whose currency has appreciated the most.

"So the question that Ben Bernanke and his colleagues should ask themselves is whether they have thought through the global ramifications of their actions, and how the strategic consequences might rebound against America itself. "

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