May 24, 2009

The next reserve currency

The US Federal Reserve in in the process of debasing the US Dollar as the reserve currency.
The process of printing untold amounts of US dollars is well under way and shows no real signs of abatement. The UK and Eurozone are not far behind.

I believe the market will move toward commodity baskets as the next reserve currency. Given the steep contango for many physical commodities, The cheapest way to obtain meaningful exposure would seem to lie in holding asset rich economies (Canada,Norway,Brazil,Australia). My guess is that Canada has the most solvent banking system of the four.

The artificial strength in the dollar post Lehman Brothers was not caused by demand for the safehaven currency (as many media pundants speculate) but rather the call on capital called by the deleveraging banking system on hedgefunds and others who borrowed for carry trades ( the Icelandic trap).

While I'm not certain of the timing of a dollar crisis, the combination of demand destruction in the means of extracting many of the worlds commodities, combined with the inflationary monitary policies of western nations, desparate to "fix" the banking crisis, set the stage for a perfect storm for the US dollar.

Stay Tuned.

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