Yes, a new currency was added to the International Monetary Fund’s (IMF) reserve basket on October 1 – the Chinese yuan.
And for months leading up to it, I’ve been hearing a steady drumbeat of doom from many financial pundits sending “dire warnings” about the imminent death of the U.S. dollar.
A collapse in the buck was inevitable they said, because once the yuan becomes an official reserve currency, the whole world would rush to sell dollars hand over fist and buy yuan instead.
Baloney, is what I have said all along.
Well … On October 1, the yuan joined the IMF’s basket of reserve currencies known as Special Drawing Rights – SDRs for short. And guess what? It has pretty much moved in one direction: Straight DOWN!
Meanwhile, the dollar has enjoyed its longest winning streak in more than two years against the yuan. If fact, the yuan has declined against the dollar 9 of the last 10 days since getting the IMFs seal-of-approval.
Not only has the yuan dropped in value against the dollar, so has the euro, pound, and yen.
Look, anyone with an ounce of common sense could have figured out this prediction was pure baloney in the first place.
It’s simply impossible, and preposterous to think the yuan or any other currency for that matter can dethrone the dollar at this time!
The dollar has been rising in value against the yuan alone since 2013. So why would global investors now suddenly jump off that profitable trend by selling assets priced in dollars when they have been making a fortune off the dollar’s strength, and then swap into a currency that’s been steadily depreciating?
It just doesn’t make any sense.
One central bank that did take this wrong-way advice was the People’s Bank of China (PBOC). China’s foreign-exchange reserves declined in September, dropping to $3.17 trillion, the lowest since 2011. That’s because China’s central bank was selling dollars in a desperate attempt to prop up the yuan BEFORE the currency joined the SDR.
But once the deed was done, the PBOC was bound to go right back to letting the yuan weaken further, just as they have been doing all along.
Bottom line: The yuan is now a reserve currency, but the U.S. dollar didn’t plunge and the U.S. financial markets are not smoldering in a pile of ash, as so many “experts” predicted. If you got fooled by them, simply ignore the next dire warning you hear from these false prophets of doom and don’t get fooled again!
The PowerShares DB US Dollar Index Bullish (NYSE:UUP) closed at $25.30 per share on Monday, down $0.06 (-0.24%). Year-to-date, the largest ETF tied to the U.S. dollar has fallen 1.36%.
This article is brought to you courtesy of Money and Markets.