Fiat currencies are in big trouble. Dominique Strauss-Kahn, the head of the International Monetary Fund, suggested Friday the organization might one day be called on to provide countries with a global reserve currency that would serve as an alternative to the U.S. Dollar.
Currency problems don't end with the Dollar. The Euro is in trouble, too (http://markostake.blogspot.com/2010/02/euro-now-leads-dollar-in-race-to.html).
Next on the currency hit parade is the Pound Sterling. Rumors are swirling that hedge funds, including the carnivorous George Soros, are taking heavy short positions in anticipation of a Pound meltdown. Weakness in the Pound is partially being blamed on gridlock in Parliament.
The Pound hit a nine-month low against the Dollar today as fears over a hung parliament sparked a sterling sell-off. The currency fell sharply to as low as 1.478 against the greenback as well as slumping below 1.10 against the Euro. Pressure on the Pound comes as the Conservatives’ poll lead against Labour narrows – threatening an indecisive general election result when markets want firm action to sort out the UK’s dire public finances.
There are also fears that U.K. sovereign debt is in deep trouble. Joining the fray has been a recent report by Morgan Stanley (http://www.fundmymutualfund.com/2009/12/morgan-stanley-ms-lists-uk-sovereign.html).
Britian risks becoming the first country in the G10 bloc of major economies to risk capital flight and a full blown debt crisis over the coming months.
"In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe Pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery,” the report said.
Morgan Stanley said that such a chain of events could drive up yields on 10-year UK gilts by 150 basis points. This would raise borrowing costs to well over 5% - the sort of level now confronting Greece and far higher than costs for Italy, Mexico or Brazil.
This morning, the Pound dropped almost four cents in a frantic two hour period of trading as the breach of the key $1.50 level triggered a wave of speculative selling in the currency.
Hans Redeker, global head of foreign exchange strategy at BNP Paribas, said relatively high yields on UK government debt were no longer providing the Pound with support because they did not reflect better UK economic prospects but a re-assessment of UK sovereign risk.
Marko's Take? The multi-national death of fiat currency is well on its way to fruition. Ironically, the U.S. Dollar is rallying - not because of its strength, but because of the Pounds' and Euros' weakness!
It's simply a matter of time before some form of hard asset-backed currecy replaces all the increasingly growing worthless paper flying around. This is a key step to stabilizing the world financial system!
Think the Gold Standard is a bad idea? TAKE ME ON!
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