China and Brazil Plan to Evade the Dollar

An important article in the Financial Times reveals that China and Brazil are working around the dollar.

It's interesting that the public denunciations of the dollar's reserve status are growing steadily more blunt, less circumspect, and now include China's unveiled ambition to replace the dollar. It is surprising indeed that the dollar has not reacted with more vigor to the news. Perhaps it's because it was not widely reported in the US, or because we seem to have a curious sense of denial about the future of the US$, which is clearly not bright.

In an earlier post, I discussed China's (non)-manipulation of the yuan, noting that Paul Krugman thinks China's position is weak. I wonder if it still seems so weak to him. Check out the chart of the dollar's recent performance in the broad dollar index, taken from Dow Theory Letters. Pretty exciting stuff - the dollar has fallen from 88 to 82 since March. It looks like the rally may not make it to 10,000 as I thought previously.

As I wrote recently, the status of the dollar is likely to be the next big blow to the financial system. When a currency depreciates, it causes severe stress on the financial sector, including panicked runs on banks, which are, of course, entirely rational given the fall in the value of the currency. Wouldn't you want to withdraw your assets from banks and put your money in some other currency, or even in commodities? Bank runs lead to bank failures, which lead to shocks to financial markets, and panicky interventions by authorities. Expect such interventions as we move into the next phase.

I've considered an ETF called UDN, which is comprised of dollar short positions, but I think that Seabridge Gold is the safer bet (and indeed, may have better upside potential), as it is a Canadian company, with assets in Canadian dollars, and perhaps more importantly, it is tied to gold which will almost certainly respond strongly and favorably to a decline in the dollar.