[Dan]

It would be wrong to simply assume that asset managers will keep sticking with the USD because there is no other choice. Reserve managers and governments are working actively on mitigating risks involved in investing in the USD or on avoiding the USD altogether. At some point – possibly sooner rather than later – that could mean buying fewer, perhaps significantly fewer, dollars and USD-denominated assets than they have in the past.


Considering that China appears to be at the vanguard of the tactic of trying to simply avoid the USD, this may be the thin end of a very big wedge that could dislodge the dollar a little more quickly from its position as the “global medium of transaction” and primary reserve currency than most people have assumed. Meanwhile, central banks can shift the composition of their reverses with relative ease, it would appear. With the US undertaking a significant round of quantitative easing and a huge expansion of fiscal policy, the USD will have to pay a price over the course of the next few quarters, at least, as investors shun it and seek out alternative and less risky currencies. In general terms, the USD has tended to reflect the relative strength or weakness of the US fiscal position over the last two decades or so and with the budget deficit likely to head towards USD2 tn this year, 2009/2010 should see the USD experience further, general downward pressure.

Given the benefit that the US has derived form being able to sell large volumes of government debt at relatively cheap levels because of the primacy of the USD as the main global reverse currency, it should not be complacent about the USD’s future as a top reserve asset.

EUR should stand to benefit in the medium term from investor concerns about the over-valued USD. Trade Idea: buying EUR/USD at 1.3760, risking 1.3620 and with a target of 1.4200.