The demise of the dollar

With America's foray into quantitative easing and China calling for a new world reserve currency, the dominance of the dollar is under threat. What does that mean for investors?

Currency markets were shocked to hear the Fed announce its intention to purchase $300bn of US treasuries and follow Switzerland, Japan and Great Britain into the murky territory of quantitative easing the purchase of government bonds with money created for that purpose that previously did not exist. It triggered an immediate sharp fall of the dollar by 3.1% on a trade weighted basis, the biggest single move since 1985.

A glance at the chart below suggests a decisive top has now formed and the expected deterioration of the dollar is underway. Happily for portfolios, as the dollar fell sharply, gold rose significantly. The willingness of the US authorities to create as many dollars as they think necessary, irrespective of the consequence, is finally weighing on the currency as we would expect and driving investors to gold.

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