Falling US dollar equals increasing risk appetite? Hmmm…seems strange.

The greenback fell to 14-month lows against major currencies last week before Big Ben Bernanke wagged his finger -- warning that, "The time will come when we have to tighten…We will look at the broad outlook to decide the timing and pace of exiting currently loose policy."

Well according to web and paper reports, that is. A lot of baloney I say. For there was nothing new in Big Ben's remarks. He merely voiced out what is plain and obvious - loose policy will head for the exits once the US outlook improves. Plain. Obvious.

Others brought back the oft-repeated rationale - risk aversion has exited. I repeat seems strange.

For sure, the weaker US dollar is aiding recovery in the US. Weekend reports show that the US trade deficit fell to US$30.71 billion in August from US$31.85 bil in the previous month, with exports growing for the fourth straight month. Positive yes. Still, exports account for only 10 per cent of the US economy. The 0.6 per cent fall in August imports underscore the continued weakness in America's domestic demand.

When viewed in relation to the on-going rally in traditional risk assets - equities, commodities and commodity-related currencies - the US dollar's weakness could be taken to mean that safe-haven buying has slowed. But is the USD still a safe-haven currency?

Maybe. Maybe not. Because the US dollar's downward spiral will cause dislocations elsewhere. Raising risk.

Much more than Big Ben's threat that someday (he doesn't know when) interest rates will rise, the US dollar's decline was ‘temporarily' short-circuited by intervention from Asian central banks (again). South Korea, Taiwan, the Philippines, Thailand, Indonesia and Hong Kong bought the greenback to avoid being ‘beggared' - hurt their exports - by its depreciation.

And this shows risk is reduced? Bite me.

The US dollar's depreciation is increasing risk, not reducing it. With the US budget deficit forecast to 13.5 per cent of GDP this year - second only to Britain's 14.4 per cent and higher than Iceland and Ireland's 13.0 per cent - the big dollar will continue to shrink. If the fall becomes disorderly…look out below!

There may be some truth after all in the unsourced UK press report that China, Russia, the Gulf Arab States, and France convened a secret meeting to develop a multi-year plan to dump the US currency and replace it with a basket of euro, yuan, yen and the Gulf Common Currency.

The named countries immediately denied this. Besides, there is no Gulf Common Currency yet - not until 2010 - and the Chinese yuan is still not freely convertible. But where there's smoke…

Conspiracy theory or not, this brings to the fore the market's concern about the big dollar growing small.