Why 2006 is set to be a bad year for the dollar

The US Congress has just approved another rise in the US debt ceiling, to nearly $9 trillion. The US trade deficit, at 7% of GDP, is at 'Banana Republic' levels, say Andrew Selsby and John Robson of RH Asset Management. With the threat of rising Japanese interest rates already hurting Iceland and New Zealand, how much longer can the dollar remain the world's reserve currency - and which assets might benefit?

The US Congress had no option but to agree for the fourth time since 2002 to raise the US debt ceiling, this time to $8.965 trillion. Minority leader, Harry Reid, said this was a result of reckless fiscal policy' and went on to suggest that there was little point in having a ceiling if all you do is keep raising it.

Of course, it had to be raised because the alternative would have been for the US to default on its foreign and domestic liabilities, unthinkable. We like the way Richard Russell reported this process: 'The government won't default, it will simply continue to do what it has been doingcreate more dollars to pay off its rising debts and deficits. It will continue to create dollars until the dollar becomes close to worthless and at that point either a new acceptable currency will come to the fore or a whole new system.'

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