To: Zeev Hed who wrote (7585 ) 12/12/1998 3:12:00 PM From: MikeM54321 Read Replies (3) | Respond to
Re: Current Account Deficit, Euro, GoldFrom StockSite.com: The dollar has been the reserve currency of choice for the world's foreign central banks. However, with the launch of the Euro on Jan. 1, 1999, the dollar is going to face some serious competition. For several reasons the Euro could become the reserve currency of choice, replacing the greenback. The U.S. has a large trade deficit and a small amount of currency reserves. Conversely, the 11 countries of Europe that are entering into this monetary union have a large trade surplus and a significant amount of foreign currency reserves. .... The willingness of foreigners to buy U.S. stocks and bonds has been the thrust behind our surging financial markets, all the while keeping the dollar strong. When the Euro is introduced, it will be the first real challenge to the dollar's supremacy, which may make it difficult for the dollar to maintain its strength. As money leaves our bond market in search of other investments, our stock market will inevitably follow.From Yesterday's WSJ: The U.S. current account deficit swelled to a record $61.3 billion in the third quarter, reflecting an ailing global economy that is eroding U.S. sales and profits aboard…. If you borrow enough, sooner or later your credit rating goes down. The common European currency will be launched in January, and there could be attractive alternative places to invest, and that would make it more costly for us to finance our deficit.MikeM Asks: Doesn't the Euro stand a chance of taking away some of that $1 Trillion, that foreign countries have so happily loaned us to finance our debt? Wouldn't this lead to a decline in the value of the dollar, hence a rush to gold?Zeev Replies: Absolutely not, IMHO. True the EURO will compete with the dollar as a reserve currency, but that will actually cause Central bankers to sell gold reserves (and they have 10 years production of the stuff in their vaults). Central banks will use mostly dollars, Yen (or the then valid Asian currency, equivalent to the Euro) and the new Euro as reserves, dumping some of their gold for interest bearing Euro's. When that happens (and it will be gradual since the central banks probably would not want to see gold go much below $250/ounce) it will cause oversupply of gold, and as any other commodity, gold should decline.
