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A BLAST FROM THE PAST AND MORE
Former
Fed Chairman Alan Greenspan had a few “choice” words for his Russian
counterparts late last week when he warned them that their refusal to
allow the Ruble to meaningfully appreciate against the dollar may have inflationary
consequences.
Greenspan
Warns Russian Authorities Against Investing in U.S. Dollar
Created:
20.10.2006 12:52 MSK (GMT +3), Updated: 15:43 MSK
MosNews
Russia
should be wary about the inflationary impact of buying U.S. dollars to
insulate its economy from an influx of foreign earnings from oil
exports, former Federal Reserve Chairman Alan Greenspan said on
Thursday, Oct. 19.
Tulips
Come To Mind...
Greenspan
went on to point out that Russia’s massive Trade Surplus – owing to
600 million per day in oil revenue – [implied] should naturally lead
to a rising domestic currency as petrodollars are repatriated – an
event or process dubbed “Dutch Disease.”
Dutch
Disease refers to the potential negative long-term impact of one
explosive sector —- oil, in the case of Russia —- which
boosts the value of the currency, making locally produced goods less
competitive compared to foreign goods.
He
warned that artificially depressing their currency to cure “Dutch
Disease” – by buying foreign currencies like dollars - could lead to
inflationary problems down the road.
The
Russian Central Bank has intervened in the foreign exchange market by
buying U.S. dollars to slow the ruble’s growth. The move, however,
fuelled money supply growth of about 45 percent and inflation of around
10.9 percent in 2005.
Wow,
money supply growth of 45%. That sure sounds inflationary, doesn’t it?
Me wonders whether that 45% growth rate refers to the Russian equivalent
of M3? That would be the very same measure of money supply that Sir Alan
banished in the U.S. - as one of his last official acts as Chairman of
the Federal Reserve – isn’t it?
Anyhow,
Greenspan goes on to “speculate” about the Ruble’s future
prospects as a “potential” Reserve Currency – and he points out
how important the “rule of law” is – as a fundamental precondition
for such an occurrence. Me wonders, again, speaking of rules in law - if
he might be referring to such fundamental things as “habeas
corpus” – an inalienable, basic human right since the 12th
century that the U.S. recently discarded. Who knows, Greenspan always
did have a way with words – didn’t he?
Thunder
From Down Under…
Sir
Alan wasn’t the only prominent financial figure speaking his mind last
week. As the Sydney Morning Herald’s John Garnaut reported,
Costello
seeks orderly $US withdrawal
[Australian]
TREASURER Peter Costello has called on East Asia's central bankers to
"telegraph" their intentions to diversify out of American
investments and ensure an orderly adjustment…
Perhaps
great minds really do think alike. Mr. Costello was the second Central
Banker within a week to recommend a retreat, albeit an orderly one, from
the U.S. Dollar.
While
the above graph shows a recent dip in the US Dollar Index, we should
remember that the currencies being referenced by Messrs. Greenspan and
Costello – namely, the Chinese Yuan and the Ruble - ARE
NOT part of this basket:
US
Dollar Index Components and Weighting (USD)
The
U.S. Dollar Index® is computed using a trade-weighted geometric average
of six currencies. The six currencies and their trade weights are:
|
Euro
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57.6%
|
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Japan/yen
|
13.6%
|
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UK/pound
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11.9%
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Canada/dollar
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9.1%
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Sweden/krona
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4.2%
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Switzerland/franc
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3.6%
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These
contract specifications are subject to change.
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We
can monitor the Ruble and the Chinese Yuan [RNB] from this
source:
 |
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US/CAD
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1.1250
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US/AUD
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1.3162
|
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US/ZAR
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7.5350
|
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US/Euro
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0.7924
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US/SF
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1.2588
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US/BP
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0.5311
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US/Yen
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118.75
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US/Rub
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26.86
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US/Yuan
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7.8960
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US/Rupee
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45.15
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US/Mexican
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10.83
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Charts...
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Today’s
Market
Overseas
equity markets began the week with a “pop” as Japan’s Nikkei Index
added 137 points to close at 16,788. Meanwhile, North American markets
had a bit of fizz of their own with the DOW ahead 114.54 to 12,116.91,
the NASDAQ tacked on 13.30 to 2,355.60 and the S & P up 8.40 to
1,377.00. NYMEX crude oil futures fell .52 to end the day at 58.92 per
barrel.
Interest
rates were 4 – 6 basis points higher across the curve with the
benchmark 2-year bond ending the day at 4.91%, the 5-year at 4.80% and
the 10-year bond at 4.82%.
In
foreign exchange, the U.S. Dollar Index gained .44 to end the day at
86.50.
The
precious metals markets had a Jekyll and Hyde type of day with COMEX
gold futures being mauled to the tune of 13.60 to end the day at 580.70
per ounce while COMEX silver futures were squashed for .31 to end the
day at 11.62 per ounce. Meanwhile, the XAU Index managed to eke out a
gain of 1.61 to 130.23 and the HUI Index was ahead by 2.74 – ending
the day at 304.53.
There
is no economic news of consequence due tomorrow, but Wednesday the FOMC
meets and renders its much anticipated decision on short term interest
rates!
Wishing
you all the most pleasant of evenings and a prosperous tomorrow!
Rob Kirby Back
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