The witches' brew of 1987 is back again

The witches' brew of 1987 is back again
Posted by Ambrose Evans-Pritchard on 08 Nov 2007
Tags: dollar, Euro, Wall Street, Federal Reserve, US Treasuries
We forget now, but the triple backdrop to the Wall Street crash
in October 1987 was a tumbling dollar, record oil prices, and an inflation mini-scare across the world.
Double, double toil and trouble
This witches’ brew is coming to the boil again
with some violence.
The dollar has crashed through historic support levels
to an all-time low of 75.61 on the global index,
and oil is flirting with $100 a barrel.
Take a glance at these two dollar charts.
The Greenback has slumped to 91 cents against the Canadian Loonie, the lowest since Canada’s currency was floated in 1950.
It has fallen for three years against the Brazilian real,
the Mexican peso, the Russian ruble, et al –
the first time it has ever lost ground in this
fashion against a mix of emerging market currencies.
And, of course, the euro has risen 70pc in six years to $1.47.

Why is the dollar crumbling? Is it just because the Federal Reserve has begun to cut interest rates, while other central banks are still tightening?

Or have we reached the moment when the United States is downgraded as an economic, political, and military power by the rest of the world - permanently - reflecting its new status as a super-debtor with $3 trillion in external liabilities?

What we know is that Asian and Mid-East central banks are cutting their holdings of US Treasuries at a brisk clip. Qatar has cut the dollar share of its $50bn sovereign wealth fund from 98pc to 40pc.

The effect was disguised as long as the credit bubble continued to lure huge sums of foreign “hot money” into America’s $2.2 trillion commercial paper market. But this market is half-frozen. Loans have contracted by $300bn in twelve weeks. The risk this winter is that a hot money exodus will follow the glacial exodus of Chinese, Japanese, Taiwanese, Korean, Saudi, Emirati, and Norwegian cold money – if it has not begun already.

Nor is that the only risk. Stephen Jen, chief currency strategist at Morgan Stanley, says we may face a full-fledged crisis in short order if hedge funds armed with leverage come off the sidelines and begin to pummel the dollar as well.

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