Saturday, July 12, 2008

Dollar prophecies

Many of my friends have asked me to prophecise about the direction of the U.S. Dollar. Since I can't prophecise without data, I went and look for the dollar as a percentage of world reserve currencies, the movement against the DM and, to finalize, which nations constituted large percentages of world GDP throughout history.

I found that:

The current 63.3% dollar composition of foreign reserves is very much in line with historical standards. The Yen has actually lost some ground, while the Euro inherited most of its reserve status from the Deutsche Mark.

The Dollar predicatbly almost doubled its value relative to the DM after WW2 and stayed at a stable (and artificially high) level until the end of Brenton Woods in 1971. After Brenton Woods, the DM regained value with a vengeance reflecting the renewed strength of the German economy. Since 1980 however the USD has fluctuated in a relatively narrow range between 1.4 and 1.9 and I don't see reasons for a dramatic change

The most interesting finding was in the table below, showing the Chinese as the prominent global economy until 1820, representing as much as 30% of world GDP. After the industrial revolution lifted the western economies, the Chinese economy began a steady relative decline and by 1973 represented only 4.6%.

We all know what has been happening with the Chinese economy, which today already represents about 10% of the world GDB (PPP, IMF). The Yuan however remained stable until July, 2005 at a pegged 8.2, and only recently began to gain in value to about 6.9.

My unsurprising prophecy, from the lessons of history and the DM, is that the Yuan will continue to appreciate even if it may be difficult to find perfect investment vehicles to play the Chinese currency. I am currently researching the following article, suggested by my dear friend and reader TJ.

See you soon


1 comment:

j. horta said...

Another suggested point for thought: how is the USA going to deal in the next couple of years with the 3-trilion dollar deficit? What are going to be the reflexes of such a deficit in the Usa and other main world economies in the medium term? What measures are being taken in the Usa to reduce oil consumption and develop alternative forms of energy to bring down oil prices in the medium term?