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Originally Posted by dippin
OPEC is traded in dollars, but the value of oil and gas in other currencies, like the Euro and so on, is also going up. If this was just a matter of American monetary policy these prices would only be going up in dollars, not other currencies.
Commodities are going up in all currencies, something that wouldn't happen if it was just QE and the like. So the assertion is false.
The reason oil and commodities are going up is increased speculation and increased demand from developing nations.
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The US dollar dominates the world's banking systems. Other currencies are trivial in comparison. It is US monetary policy that drives the world economy. However, the risks of what the Fed is doing are high because this dominance could change. Very few are expressing the level of concern that we should have. We have to pray that the Fed gets it correct.
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The United States dollar is the most widely held reserve currency in the world today. Throughout the last decade, an average of two thirds of the total allocated foreign exchange reserves of countries have been in U.S. dollars. For this reason, the U.S. dollar is said to have "reserve-currency status," making it somewhat easier for the United States to run higher trade deficits with greatly postponed economic impact or even postponing a currency crisis. Central bank reserves held in dollar-denominated debt, however, are small compared to private holdings of such debt. In the event that non-United States holders of dollar-denominated assets decided to shift holdings to assets denominated in other currencies, there could be serious consequences for the U.S. economy. Changes of this kind are rare, and typically change takes place gradually over time; the markets involved adjust accordingly.
However the dollar remains the favorite reserve currency because it has stability along with assets such as United States Treasury security that have both scale and liquidity.[2]
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Reserve currency - Wikipedia, the free encyclopedia
---------- Post added at 06:49 PM ---------- Previous post was at 06:37 PM ----------
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Originally Posted by dippin
It really has nothing to do with US power or currency. And given how everyone is still pretty much flocking to US bonds, speculators are most definitely not betting against the US dollars.
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We don't know how the market is going to respond after the Fed stops QE2. The Fed is "flocking" to US bonds artificially keeping interest rates low. the party will end.
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Oil, gas and commodities have gone up in every currency. Part of it is speculation on the commodities themselves (and not on the dollar) and part of it is fast increasing demand in emerging markets. Brazil, Russia, China and India have all been growing faster than 7% a year. That is nearly half the world's population.
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While the US has an inflationary posture, China has been acting to control inflation and slow excessive economic growth.
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This was always likely to be a week which was dominated by central banks and perhaps by one in particular tomorrow afternoon as it is likely that the European Central Bank will raise its official interest-rate from 1 to 1.25%. This of course will have a lot of ramifications. However one disadvantage of having a regular meeting timetable is that others can slip in front of you!
The People’s Bank of China raises interest-rates again
Having established a recent tendency to make policy moves on bank holidays the PBOC continued this trend yesterday when it raised official interest-rates by 0.25% on what was a Chinese bank holiday. This rise means that the one-year deposit rate is now 3.25 % and the one-year lending rate is 6.31 % and as there have now been four increases since the autumn of last year rates have now risen by a round 1%.
In addition the PBOC has been raising bank reserve requirements in an attempt to cool monetary conditions in overheated China. It started this round of monetary tightening with a rise in reserve requirements and as of the last rise to 20% for large banks in March it has had seven goes at this. For those unaware of how raising banks reserve requirements works then the theory goes as follows. Banks exist to lend and left to their own devices will lend as much as they theoretically can but you can restrict this theoretical lending by getting them to deposit some of the funds at the central bank which stops them from lending this money on. Therefore in theory what is sometimes called the “credit multiplier” is restricted and in theory bank lending falls leading to a fall in monetary growth and inflationary pressure.
Why is China doing this?
There are genuine overheating fears in China and her consumer price inflation level was 4.9% in February and she is subject to the same food and fuel price pressures that are affecting the rest of the world. The forecast for her inflation in March is 5.2%. These compare to the official target of 4%. Chinese officials are so concerned about price rises that they recently persuaded Unilever not to raise prices in China!
Underlying this is a rate of economic growth that can only be described as a surge as the World Bank expects the Chinese economy to grow by 9% this year after growing by 10.3% last year. Added to this her money supply rose by 19.7% last year. It is too simplistic to say that the excess of money supply growth over actual growth is future expected inflation as it ignores potential changes in the velocity of money but even so a gap of 9.4% would worry me if I was in charge of Chinese monetary policy as it does give a fairly clear signal to say the least! Since then there has been something of a slowdown as the figures for the wider M2 measure of money supply fell to 15.2% in February but much remains to be done.
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Will the Chinese rise in interest-rates work? And have our politicians lost the plot on overseas aid? | Mindful Money
Also, keep in mind that, in the case of oil on the world market, supply is adequate to meet demand, even given the growth in China and other nations with strong growth. Demand has not driven the price increases.