US DOLLAR FACES FLIGHT IN WAKE OF FED RATE CUT.

An article from the UK’s Telegraph highlights a potential risk to the value of the US dollar. In “Fears of dollar collapse as Saudis take fright”, International Business Editor Ambrose Evans-Pritchard, reports:

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.

US INTEREST RATES CUT, COMPETING INTERST RATES GENERALLY HIGHER. WANT TO BET WHERE THE CASH WILL FLOW?

The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.

There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.

The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.

SHORT RATES LOWERED. WILL CAPITAL TAKE A HIKE? HAVE WE GONE FROM THE GREENSPAN CONUMDRUM TO THE BERNANKE PERPLEXITY?

The website “Calculated Risk” states the issues as follows:

To attract sufficient foreign capital flows to cover the U.S. current account deficit, interest rates in the U.S. may need to rise significantly.

The Greenspan conundrum was that long rates didn't rise at the Fed Funds rate was increased. Bernanke's conundrum may be that long rates don't fall (or maybe even increase) as he lowers the Fed Funds rate!

That is the risk. Long rates remain high to attract capital to keep the US deficit financing from collapsing, while the underlying housing market is choking on such rates.

WE ARE IN DARKENING DAYS IN THE DESERT OF THE REAL!