Conspiracy Theories and the Global Stock Market Melt-down
Do you believe in conspiracy theories? Sometimes they are difficult to refute. Such was the case last week, just after the Euro had soared towards a 12-month high of $1.30, and the British pound, itself ridden with large trade and budget deficits, stood mighty tall at $1.90, with traders setting their sights for $2 for the pound. The US dollar lost 7% in just six weeks against America's main trading partners, and was 28% lower since January 2002, to stand just 1% above its 1995 low. Then on Sunday May 14th, currency traders in London, picked up an obscure report from the UK’s Observer newspaper, that indicated the International Monetary Fund was in behind-the-scenes talks with the EU, Japan, the US, China and other major powers to arrange a series of top-level meetings to tackle imbalances in the global economy, and address the dollar sell-off that was rattling global stock markets.
The United States needs to draw in more than $3 billion every working day just to break even from external deficits, and prevent the US dollar from falling further and keep interest rates from rising too far. The US current account deficit is the broadest measure of trade, including financial transfers along with goods and services, and widened $136.9 billion from 2004 to $804.9 billion in 2005, representing 6.5% of US gross domestic product, up from 5.7% in 2004.he US dollar is heavily dependent upon its role as the world's reserve currency, used for transactions in internationally traded commodities such as copper, crude oil, and gold. Therefore, foreign central banks must stockpile US dollars, which account for more than two thirds of all central bank reserves worldwide. This special reserve status means that the US dollar is always in demand, whatever the underlying strength of the US economy, or the level of US interest rates.
But the US dollar’s counter trend rally from January 2005 to March 2006, that rode on the back of 16 quarter-point rate hikes by the Federal Reserve, started to unravel in April, following news that Sweden's Riksbank Sweden has cut its US dollar holdings, from 37% to 20%, with the Euro's share rising to 50 per cent. Kuwait, Qatar and United Arab Emirates also said they were buying Euros. Central banks in China and Japan hold less than 2% of their combined $1.75 trillion of foreign currency reserves in gold, and instead, hold depreciating US bonds. On April 21st Russian finance minister Alexei Kudrin, dropped the biggest bombshell on the US$ at the annual meetings of the World Bank and International Monetary Fund, by openly questioning the dollar's pre-eminence as the world's absolute reserve currency. The Russian central bank raised the Euro's weight in the currency basket against which it targets the ruble, by 5% to 35% on August 1st, 2005, reducing the dollar's share to 65% from 70 percent.
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