Monday, November 08, 2004
India, Galileo and the US dollar
First, China announced it was investing $260 million into the EU-sponsored Galileo satellite system. Now, it seems like India is planning to invest $380 million into the project as well. Given that the full cost of the project is expected to be about $1.4 billion, this means that India and China are funding nearly half of the project. Why?
I suspect this may be a strategic decision by both countries to avoid depending on the Galileo system's main rival, the Pentagon funded GPS system. Though the Galileo system is going to be subscription based, a country cannot be shafted for not joining in invading small oil-rich countries, for example. I suspect this may also be a harbinger of things to come. If the Bush second term involves antagonising the rest of the world some more, we might well see a global realignment of sorts.
Meanwhile, in the financial markets, there were plenty of rumours floating around around yesterday that India and Russia were offloading the dollar. Today, the Financial Times confirmed that it was not just India and Russia, but also some middle eastern investors AND China.
The dollar sell-off has resumed amid fears among traders that Mr Bush's victory will bring four more years of widening US budget and current account deficits, heightened geopolitical risks and a policy of "benign neglect" of the dollar. Many currency traders were taken aback on Friday when the greenback fell in spite of bullish data showing the US economy created 337,000 jobs in October. "If this can't cause the dollar to strengthen you have to tell me what will. This is a big green light to sell the dollar," said David Bloom, currency analyst at HSBC, as the greenback fell to a nine-year low in trade-weighted terms.
Speculative traders in Chicago last week racked up the highest number of long-euro, short-dollar contracts on record. Options traders have reported brisk business in euro calls - contracts to buy the euro at a pre-determined rate. However, the market has been rife with rumours that the latest wave of selling has been led by foreign governments seeking to cut their exposure to US assets.
India and Russia have reportedly been selling US assets, as well as petrodollar-rich Middle Eastern investors. China, which has $515bn of reserves, was also said to be selling dollars and buying Asian currencies in readiness to switch the renminbi's dollar peg to a basket arrangement, something Chinese officials have increasingly hinted at. Any re-allocation could push the dollar sharply lower and Treasury yields markedly higher.
Maybe the currency trader among us could shed more light on whats going on? Is this the beginning of the dollar meltdown thats been threatening to happen for a while, given the over-valued state of the greenback? Or is this just a temporary correction?
UPDATE: I see that Brad has commented about the dollar story here and here.
I suspect this may be a strategic decision by both countries to avoid depending on the Galileo system's main rival, the Pentagon funded GPS system. Though the Galileo system is going to be subscription based, a country cannot be shafted for not joining in invading small oil-rich countries, for example. I suspect this may also be a harbinger of things to come. If the Bush second term involves antagonising the rest of the world some more, we might well see a global realignment of sorts.
Meanwhile, in the financial markets, there were plenty of rumours floating around around yesterday that India and Russia were offloading the dollar. Today, the Financial Times confirmed that it was not just India and Russia, but also some middle eastern investors AND China.
The dollar sell-off has resumed amid fears among traders that Mr Bush's victory will bring four more years of widening US budget and current account deficits, heightened geopolitical risks and a policy of "benign neglect" of the dollar. Many currency traders were taken aback on Friday when the greenback fell in spite of bullish data showing the US economy created 337,000 jobs in October. "If this can't cause the dollar to strengthen you have to tell me what will. This is a big green light to sell the dollar," said David Bloom, currency analyst at HSBC, as the greenback fell to a nine-year low in trade-weighted terms.
Speculative traders in Chicago last week racked up the highest number of long-euro, short-dollar contracts on record. Options traders have reported brisk business in euro calls - contracts to buy the euro at a pre-determined rate. However, the market has been rife with rumours that the latest wave of selling has been led by foreign governments seeking to cut their exposure to US assets.
India and Russia have reportedly been selling US assets, as well as petrodollar-rich Middle Eastern investors. China, which has $515bn of reserves, was also said to be selling dollars and buying Asian currencies in readiness to switch the renminbi's dollar peg to a basket arrangement, something Chinese officials have increasingly hinted at. Any re-allocation could push the dollar sharply lower and Treasury yields markedly higher.
Maybe the currency trader among us could shed more light on whats going on? Is this the beginning of the dollar meltdown thats been threatening to happen for a while, given the over-valued state of the greenback? Or is this just a temporary correction?
UPDATE: I see that Brad has commented about the dollar story here and here.
