What should investors do as central banks reduce dollar reserves?
*Dow Theory Letters, Richard Russell, August 18, 2006
“Now here’s an interesting consideration, and I’ve thought about this a lot. The people who run the central banks of the world are well aware of this debt situation in the US. They are well aware that the US is the world’s greatest debtor and that the situation is becoming progressively worse. These foreign central bankers know that the US absolutely must opt for inflation in view of the US’s massive debts and liabilities.
But the problem is that all these central banks use US dollars as their reserves. In some cases, dollars comprise almost 100 percent of their foreign reserves. How do they handle this predicament, how do these central banks “protect themselves” against a dollar collapse? The trick is to diversify, and increasingly, that’s what they’re doing.
Jim Grant of “Interest Rate Observer” fame notes in his latest report that Russia, flush with oil money, has reduced its dollar holdings from “70% or so a year ago” down to 40%, and the dollar-ruble exchange rate sits at a seven-year low.” Sweden has lowered its dollar reserves from 37% to 20%. Italy is mulling over diversifying into the British pound. Obviously, many Arab nations will be moving to decrease the percentage of their dollar holdings.
As I see it, the move to cut down on dollar holdings is just beginning. It will pick up speed as US indebtedness builds. And, of course, politics will play a major part in the world’s distancing itself from dollars.
In view of all of the above, what should our position be? The only thing I can think of is to diversify.”
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