The "Pesofication" of the U.S. Dollar

I've dubbed this the "pesofication" of the U.S. dollar. But we're really talking here about the dollar's long-term demise. The pesofication of the dollar represents the end of the greenback as a major world currency and figures to be one of the major long-term challenges that we U.S. investors will face. The dollar's demise was set in motion several years ago. But the greenback's fate was sealed in late April, when U.S. Federal Reserve policymakers had a final chance to take a stand against inflation - and failed to do so. Let me explain ... Catalysts for the "Pesofication" of the U.S. Dollar Four years ago, I referred to the U.S. greenback as the " Bernanke peso ." I coined this term, reasoning that U.S. Federal Reserve Chairman Ben S. Bernanke's decision to cut interest rates even as inflation was accelerating was bound to cause the dollar to lose value at an ever-increasing rate. My prediction held up for a time, but was then derailed by the little matter of the collapse of the U.S. banking system. However, after the Fed's April 27 meeting , I can report that we're right back on track, and the pesofication of the dollar is progressing with startling rapidity. That late-April meeting of the central bank's policymaking Federal Open Market Committee (FOMC) was the Fed's best chance to set a new course before its $600 billion " quantitative easing " program is scheduled to end on June 30. (The FOMC meeting scheduled for June 20-21 falls too close to the end of the Fed's quantitative-easing/U.S. Treasury-bond-purchase program for a new policy to be established.) Bernanke seemed to underscore this by announcing that the central bank would, indeed, stop purchasing Treasury bonds on that date. He also explained that, in his view, the "market effect" of bond purchases is determined by the "stock" of bonds outstanding - as opposed to the "flow" of bonds into and out of the market. We shall see. Here's my bet: When the Fed stops buying about $225 billion of the Treasury's $400 billion quarterly funding needs, all hell will break loose in the Treasury bond market. After all, the two largest T-bond buyers are not going to be particularly active this summer: The Bank of Japan (BOJ) will be too busy spending money on that country's reconstruction from the earthquake/tsunami/nuclear power plant accident to be buying much U.S. government debt, while its counterpart in Mainland China - the People's Bank of China - has made it clear that it regards the United States as a pretty dodgy credit risk . Please read on by clicking here ...