We had a couple of insightful questions from a reader this week. Thanks Francois. First up was:
“Have you seen any (intelligent) analysis to indicate what would happen to the NZ Dollar when the US Dollar collapses?”
Well we’ve made a few comments on this before although we’ll leave it up to you to decide whether this passes for “intelligent analysis” or not!
So we’ll have a crack at expanding upon this further today.
Firstly the rationale behind the NZ dollar rising in recent years is two fold:
1. Interest rate differential. i.e. ours are higher than most others and expected to rise, so money is coming here in a search of higher yield. This is why the kiwi dollar is one of the most traded currencies globally.
2. Commodity currency. Rising commodities demand and prices (such as dairy, beef, lamb, logs) mean there is more demand for NZ dollars to pay for these. So more demand means a higher currency.
So would this rising NZ dollar change in a US dollar collapse? The most obvious thought might be that if the US dollar were to collapse or massively lose value then the NZ dollar might rise massively against it. However there is another side to consider.
In an article from March “If/When the US Dollar Collapses, What Will Gold be Priced in?” we discussed a few possibilities as to how a US dollar collapse could occur. One of these was that it could be a more gradual event…
“Take the situation in Ukraine with the US threatening sanctions cutting Russia off from the international financial system. This could backfire on the US. If Russia managed to continue to trade perhaps using gold like Iran did recently, this could prompt other nations to confront the US and see less and less use of the dollar.
Of course, all currencies today are priced with the USD as the reference point. And anyone with a cursory understanding of monetary history will know that this is a floating or elastic reference point.
But the US dollar needs to function in order for all currencies to continue to function.
Many talk about the US dollar being the first to collapse. However as it is at the centre it could likely be the last. We first heard Sandeep Jaitly say this many years ago and it took a bit to get our head around. More recently Ronald Stoeferle also was of this theory when in NZ last year.
We are seeing this currently, with many emerging market currencies falling massively against the dollar in the past year. A collapse is more likely to begin in the periphery and move towards the centre. So somewhat paradoxically, in a “dollar collapse”, it may well be that the US dollar is the last domino to fall.”
As we noted “all currencies today are priced with the USD as the reference point. And anyone with a cursory understanding of monetary history will know that this is a floating or elastic reference point.
But the US dollar needs to function in order for all currencies to continue to function.”
So if the reference point (the USD) tumbles then it will take the rest with it.
This is what we have seen in slow motion over the past 14 years or so. The US dollar has lost value versus gold but so has every other fiat currency on the planet. Just some (like the kiwi dollar) at a slower rate than the US dollar.
But in the final stages of a US dollar collapse we could see a repeat of 2008 where money flooded back to the US causing every other currency (including the NZ dollar) to plunge in value against the US dollar. And so against gold they would likely plunge even more.
Why would money flood back to the US?
Well initially at least it would likely move back into US government treasury bonds which continue to be seen as a safe haven. But we could then see a countervailing movement into gold after this, much like in 2008 but perhaps on a much larger scale?
As we noted in the article above we have seen these large falls in value of emerging markets currencies versus the US dollar over the past year or so with the Federal Reserve discussing and then beginning, supposedly at least (see this article for why this might only be supposedly: A Fake Taper), to wind back its money printing programme. But in a US dollar collapse it could occur in a much more widespread manner.
Ronald Stoeferle who we mentioned in the above referenced article discussed this in a Q&A session when in Auckland last year in answer to the question: “Will the US lose its reserve currency role?”
His reply was that:
“He didn’t think so. Mainly because the US is so dominant militarily. In fact he thought the US dollar will likely be the last fiat to fail.
A view we have noted in the past more than once which is shared by Sandeep Jaitly and one that NZ dollar based buyers of gold should take heed of. As if the US dollar is the last to fall, at some point in the future the kiwi dollar may be very weak against the US dollar. Something virtually no one expects now, and gold would be the hedge against this.
So it seems likely in a serious US dollar collapse we could see a much weaker kiwi dollar. But also potentially gold having much greater purchasing power.