Monday, December 06, 2004

Everybody's getting jittery about the continuous collapse of the dollar. When rumors begin spreading far and wide that the biggest public holders of US debt are thinking about getting out now, how long until private capital decides the stars are perfectly aligned to attempt a run on the currency?

Precisely for this reason, the mighty Japanese come thundering into the room.
Japanese Vice Finance Minister Koichi Hosokawa said Japan was prepared to counter the U.S. currency's slide.

``Recent yen gains don't necessarily reflect fundamentals of economies,'' Hosokawa said today at a press conference in Tokyo. ``We will act aggressively on its rapid moves in a timely manner.''
When speculators start licking their chops, the authorities in Taiwan -- the #3 holder of US debt behind Japan and China -- stomp it down as well.
The Liberty Times in Taipei reported yesterday that Taiwan may pare U.S. assets. The dollar dropped to a record $1.3460 against the euro on Dec. 3, according to EBS, an electronic currency-trading system. Taiwan held $57.4 billion in U.S. Treasuries as of Sept. 30, Treasury Department data shows.

The central bank ``categorically denies'' the report, according to a statement issued on the bank's Web site. No one at the bank ``has publicly or privately made such a statement.''
And don't forget the South Koreans, #4 on the central bank reserve leader board.
The South Korean won shed part of earlier gains against the dollar shortly before the local market closed on Monday, due to what dealers said was suspected government intervention aimed at curbing the won's strength.

Dealers said state-run banks were seen buying dollars.
Think to yourself: what do these three countries -- numbers 1, 3 and 4 in the world in central bank reserve holdings, the vast majority being in dollars -- have in common with one another and with the United States?

Answer: all three are desperately dependent on the United States not only or even primarily for consumer demand, but for military security.

How can Japan, Taiwan and South Korea let the dollar collapse when all three receive tremendous amounts of US military aid, equipment and in some cases troops to defend them against both the People's Republic of China and North Korea? As long as these three are afraid of Pyongyang and Beijing, the US has them in a bind.

This is not to say that Washington can do whatever it wants. Surely if the Chinese alter their dollar peg, that will give Japan, Taiwan and South Korea more room for maneuver. These three are also likely to let the dollar slide slowly in real terms rather than defend it outright at some arbitrary line in the sand. Still, the US clearly has its military cards to play -- and that's a strong hand indeed.

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