Thursday, November 26, 2009


The rebellion against the U.S. dollar is gathering steam and in the latest development Russia's central bank has announced it is diversifying out of the US dollar and into several currencies - including Canada.

A senior Bank Rossii official in Moscow triggered a sharp gain for the loonie Wednesday and contributed to the U.S. dollar's slide to a 15-month low when the Bank signalled its intention to add the Canadian dollar, and possibly one or two other currencies, to its foreign exchange reserves – the third-largest in the world.

At one point last night Gold had shot up to $1,195 an ounce on the news.

Such a shift brings Russia into line with the currency diversification strategies being weighed or launched by China, Indonesia and a handful of other major central banks holding vast amounts of U.S. Treasuries.

It's another sign of what's to come.

There is no denying that the long-term trend toward currency diversification is acquiring more urgency over growing worries that soaring U.S. government deficits will eventually trigger a nasty bout of inflation. That, in turn, would severely erode the value of dollar holdings in central bank coffers around the world.

Currency specialist David DeRosa, president of DeRosa Research of New Canaan, Conn said, “there's no sign of inflation right now, but if you are a foreign central bank holding a lot of U.S. dollars, you should be concerned about whether or not the dollar is going to be destroyed by future inflation.”

And as countries move away from investing in the US dollar, how long before bond vigilantes begin pushing interest rates up on government debt?

The spectre of rising interest rates and it's effect on Canadians with mortgages has been the focus of the media for the last couple of weeks. You have also seen the Governor of the Bank of Canada, bank presidents, and economists of all strips coming out with statements of concern.

Perhaps they are noticing that in the United States, nearly one in four homes with mortgages are in an 'underwater' position (the home is valued for less than the amount their owners owe the banks holding their mortgage loans.

You can rest assured that none of those US homeowners were the least bit concerned with the first homes starting going under in 2006. But as the domino's started to fall, it dragged the rest of the nation down with them.

Wither the Canadian Alfred E. Neuman's out there who are piling on maximum debt with 5% down and huge 35 year amortizations. Are they worried?

What of the bidding wars these hyper-extended buyers are triggering. Yesterday's news brings reports of a return to condo line-ups and buying frenzy's again.

And what of the potential impact on everyone else who bought in the last five years... is the looming crisis registering in their collective psyche yet?

Mortgage rates are going to shoot upwards. And it will be the buying class of 2009 who will be be the first domino that takes down the rest.


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