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| The dollar's decline: from symbol of hegemony to shunned currency |
| 2007-11-18 |
| The decline of the dollar, symbol of US global hegemony for the best part of a century, may have become so entrenched that some experts now fear it is irreversible. After months of huge and sustained turmoil on the money markets, lack of confidence in the world's totemic currency has become so widespread that an increasing number of international traders are transferring their wealth to stronger currencies such as the euro, which recently hit its highest level against the dollar. "An American businessman over here who is given the choice would take anything but the dollar," David Buik of Cantor Index said yesterday. "I would want to be paid in yen, and if not yen then the euro or sterling." Matthew Osborne, of Armstrong International, added: "The majority would say sterling. There are a few dealers in the City who may take the view that they'll take dollars now, while they're cheap, and hold on to them for 12 months. "But the problem is so serious that there are people who in July or August might have been thinking, 'I'm paid in dollars, how annoying' for whom it's now a question of, 'Do you have a job; do you have a bonus?' " The collapse of the sub-prime mortgage market in the US, which is fuelling the dollar unrest, has already brought down one British bank, Northern Rock, and has forced others to declare vast losses. Yesterday, just as it appeared that the dollar might have finally reached its floor, there was another warning that the sub-prime crisis is going to get worse. The US Treasury Secretary Henry Paulson, warned an international business summit in South Africa: "The sub-prime market, parts of it will get worse before it gets better." Huge numbers of US homeowners are still cushioned by introductory interest rates set when they took out loans in 2005 or 2006, he said. When these introductory offers run out, their interest payments will increase, setting off another wave of defaulting and repossessions. And the dollar is enduring its rockiest spell in recent memory. Kenneth Froot, a Harvard university professor and former consultant to the US Federal Reserve, warned yesterday: "Part of the depreciation [of the dollar] is permanent. There is no doubt that the dollar must sink against periphery currencies to reflect their increase in competitiveness and productivity." Professor Riordan Roett, of Johns Hopkins University in Baltimore, told Bloomberg News: "There is a loss of confidence in the dollar and the US. It may only reflect the widespread dismay with the Bush administration, but it is obvious that the next administration, of either party, will have a steep uphill struggle." As well as reaching its lowest level against the euro, which has been trading at more than $1.47, the dollar has also fallen to its lowest level against the Canadian dollar since 1950, sterling since 1981, and the Swiss franc since 1995. Its plight was made still worse by a jarring signal from China that it was switching to other currencies. Cheng Siwei, vice-chairman of the Standing Committee of the National People's Congress, told a conference in Beijing: "We will favour stronger currencies over weaker ones, and will readjust accordingly." The warning was reinforced by a Chinese central bank vice-director, Xu Jian, who said the dollar was "losing its status as the world currency". China has stockpiled £700bn worth of foreign currency, and has only to decide to slow its accumulation of dollars to weaken the currency further. Last month, in a humiliating turn of events, the central bank in Iraq, four years after the United States invaded, stated that it wished to diversify reserves from a reliance on dollars. Korea's central bank has urged shipbuilders to issue invoices in the local currency and take precautions against the weakened dollar, and three of the world's big oil exporters, Iran, Venezuela, and Russia, are demanding payment in euros rather than dollars. Iran insisted that Japan should make all its payments for oil in yen, rather than dollars. Warren Buffet, who is reputedly the richest man in the world, was asked on the US network CNBC last month what he thought was the best currency in the world to own now. He answered: "Not the US dollar." The Wall Street Journal ran an online poll asking people which currency, they would prefer to be paid in. The euro came top, ahead of sterling, with others such as the Canadian dollar, yen and Swiss franc trailing far behind. One respondent wrote: "Being an expat in Europe with a European employment contract, I am paid in euros, and happy to get paid in euros, and shop in the US, just as long as the cycle lasts through my retirement, so I can pick up pension in Europe and retire in the US." The Federal Reserve has cut interest rates twice since September to revive the US economy, but the cuts – combined with the possibility that more were on the way – made the dollar less attractive to investors. Yesterday, it recovered slightly when one Federal Reserve banker, Randall Kroszner, dampened speculation about further interest rate cuts, saying that rates were low enough to get the economy through a "rough patch". Problems with the greenback, combined with cheap air fares, have encouraged more Britons to go shopping across the Atlantic. British tourists spent £785m in New York last year, the city's marketing and tourism organisation said yesterday. There were 1,169,000 visitors to New York from the UK in 2006, with 54 per cent going for four to seven nights and 31 per cent staying for two to three nights. They spent an average of £112 a day. The average age of the UK visitor is 40. Christopher Heywood, director of tourism PR for NYC & Company, said he expected the dollar crisis to attract yet more British shoppers. "The savvy traveller who's coming here for the shopping can really get a bargain. They're coming with one suitcase and leaving with two or three," he said. "We have people coming over here even for weekend trips to shop for the famous brand names. People are coming for the department stores that everyone around the world knows, but also for the boutique stores out of the centre of Manhattan, anything from Madison Avenue and Fifth Avenue to Bleecker Street in the West Village and SoHo." Emphasis added. I have certainly been considering the effects of this idea when deciding where to put my money for now. Other opinions for or against? |
| Posted by:gorb |
| #32 MN: Lets sit back, look at some facts and ease our worries. Leave the vrying abobut the dolar to the lefties. I'm not one of those who thinks we're gonna be buying a loaf of bread with a backpack full of $100 bills. Some of the commentary out there is pure silliness. And you're right about the dollar move being within the historical band, if you view the euro as an aggregate of the predecessor European currencies. I just happen to think that the dollar's status as a reserve currency is a net negative for the US economy. We overconsume and underproduce due to the overvaluation that results from its reserve status. |
| Posted by: Zhang Fei 2007-11-18 21:23 |
| #31 Lets sit back, look at some facts and ease our worries. Leave the vrying abobut the dolar to the lefties. Dollar value in relation to the Euro: 1990: -12.2% 1991: +1.7% 1992: +10.7% 1993: +8.5% 1994: -9.3% 1995: -6.4% 1996: +4.9% 1997: +13.5% 1998: -5.4% 1999: +16.4% 2000: +6.8% 2001: +5.4% 2002: -15.2% 2003: -16.8% 2004: -7.2% 2005: +14.6% Dollar value in relation to the Pound: 1990: -16.4% 1991: +3.2% 1992: +23.4% 1993: +2.4% 1994: -5.5% 1995: +0.8% 1996: -9.3% 1997: +3.7% 1998: -0.5% 1999: +2.7% 2000: +8.0% 2001: +2.8% 2002: -9.6% 2003: -9.9% 2004: -6.9% 2005: +11.4% I don't have the '06 numbers, but that should be enough to see that the dollar is simply moving around in relation to other currencies the same way it has for decades. In fact, I'd say the bulk of the latest dollar slide is over, and it's about time for wise investors to start buying dollars. |
| Posted by: Mike N. 2007-11-18 20:19 |
| #30 $ George Soros? |
| Posted by: Phinater Thraviger 2007-11-18 19:59 |
| #29 There is a well organized diss the US Dollar program on websites and blogs all over and has been for a few months. Someone is waging war on the dollar. It's not just the bad news from the financial markets or anything the Chinese are doing. |
| Posted by: Sock Puppet of Doom 2007-11-18 19:27 |
| #28 "Then there's seigniorage, technically the interest-free loan the U.S. receives from the millions of dollar bills held offshore. ``Printing a $100 bill is almost costless to the U.S. government, but foreigners must give more than $100 of resources to get the bill,'' Palley says. ``That's a tidy profit for U.S. taxpayers.''" Dollar Is Battered and Bruised, Not Yet Out www.bloomberg.com/apps/news?pid=20601039&refer=columnist_sesit&sid=aNX6p2PojYMc |
| Posted by: Omeremble Johnson4422 2007-11-18 16:59 |
| #27 The dollar's over-valuation vis a vis the Chinese currency has noting to do with our status as a reserve currency and everything to do with a variety of Chinese laws and anti-free market and private property rights practices that prevent the Chinese currency from freely adjusting against the dollar. |
| Posted by: Nimble Spemble 2007-11-18 16:46 |
| #26 NS: There are many reasons the dollar is sinking, but the main one is that we have put too many dollars in the market by running too many large deficits, primarily with China. The reason we're running large trade deficits with the world is because of the dollar's status as a reserve currency - the dollar's resultant over-valuation leads to our over-consumption of imports. The end of the dollar's reserve currency status will also lead to the reversal of these trade deficits. We import goods not because we like foreigners, but because domestic goods are priced out of the market because of an overvalued dollar. |
| Posted by: Zhang Fei 2007-11-18 16:37 |
| #25 of course..."it's for the children" |
| Posted by: Frank G 2007-11-18 16:31 |
| #24 The bailout will be "to help all the poor people" who were entranced into taking out mortgages they could not afford by evil bankers avoid defaulting on their mortgages and being evicted in foreclosure by supplementing their payments directly and through restructured loans guaranteed by the FHA or Freddie Mac. |
| Posted by: Nimble Spemble 2007-11-18 16:21 |
| #23 The whole reason the dollar is sinking is because parts of the world have decided not to treat it as a reserve currency. On that we don't agree. There are many reasons the dollar is sinking, but the main one is that we have put too many dollars in the market by running too many large deficits, primarily with China. |
| Posted by: Nimble Spemble 2007-11-18 16:17 |
| #22 NS: A currency will not be perpetually overvalued as a result of being the reserve currency. There are benefits that accrue to the issuer of the reserve currency, not inconsiderably seigneurage. You say seignorage, I say over-valuation. Bottom line that they're opposite sides of the same coin. The price we pay for seignorage is an over-valued currency. The whole reason the dollar is sinking is because parts of the world have decided not to treat it as a reserve currency. A reserve currency is one in which countries hold their national monetary reserves. If the dollar is less-and-less a reserve currency for foreign countries, demand for it goes down, meaning that its exchange rate goes down. In other words, the over-valuation caused by its status as a reserve currency is reversed. |
| Posted by: Zhang Fei 2007-11-18 16:10 |
| #21 could be wrong, of course, but I don't see a bailout happening. In the S&L failure, it was innocent average Joes losing their life savings due to unscrupulous bankers, which made for an easy "appeal" to the general population to bail them out with Fed $. In this case, too many greedy bankers, speculators and people with poor credit (none with much sympathy or empathy in the gen. population) who got in over their heads. I don't see the broad appeal for "fairness" working for these people. It doesn't work with me |
| Posted by: Frank G 2007-11-18 16:07 |
| #20 I smell a government bailout coming, a la 1980's savings & loans. Bingo, OJ. And the interest rate cuts were a down payment. |
| Posted by: Nimble Spemble 2007-11-18 16:05 |
| #19 It means that our currency is perpetually overvalued, since everyone uses it for reasons unrelated to our domestic economy A currency will not be perpetually overvalued as a result of being the reserve currency. There are benefits that accrue to the issuer of the reserve currency, not inconsiderably seigneurage. Our problem is not so much over or under valuation as that we have lost the ability to control the value of the dollar by allowing so many to fall into Chinese hands without them being an equal trading partner. China should never been allowed to join the WTO, a gift from Clinton and his friends on Wall Street. It's time some other currency replaced the dollar as the world's reserve currency. There is no other alternative. |
| Posted by: Nimble Spemble 2007-11-18 15:57 |
| #18 "The housing slump is expected to end up costing banks, hedge funds and other lenders an estimated $400 billion as defaults on home loans rise, according to Goldman economist Jan Hatzius. A $400 billion loss is equal to just about 2.5 percent of U.S. stock market capitalization - or a bad day on Wall Street, he wrote in a commentary on Thursday." "But most stock investors don't react aggressively to capital losses the way banks and other lenders do. A bank that aims to maintain a capital ratio of 10 percent would need to shrink its balance sheet by $10 for every $1 in credit losses, the note said. That means that if lenders end up suffering just half of the $400 billion in potential credit losses, they could be forced to reduce the amount they loan by $2 trillion. Such a drastic credit crunch could have dire consequences for the economy." I smell a government bailout coming, a la 1980's savings & loans. |
| Posted by: Omeremble Johnson4422 2007-11-18 15:52 |
| #17 Nation destruction is cheaper than nation building. Maybe we should take a second look at the costs and benefits of current GWOT tactics. Maybe enemy life should be devalued. |
| Posted by: McZoid 2007-11-18 15:37 |
| #16 It strikes me that these stories tend to be PUSHING the idea rather than reporting it. Le bingo, RC. in dictatorships political considerations trump economics every time This needs to be etched upon the tombstone of every nation we are obliged to crush in our path towards a world decontaminated of tyranny and theocracy, China's included. |
| Posted by: Zenster 2007-11-18 15:19 |
| #15 Way too many people on both sides of the aisle are reading too much into the dollar's status as a reserve currency. Several dozen developed countries are roughly on parity with the US in terms of nominal per capita GDP without having their currency being the reserve currency. In many ways, having the dollar used as a reserve currency is a curse for our exporters* and workers. It means that our currency is perpetually overvalued, since everyone uses it for reasons unrelated to our domestic economy, which makes our products too expensive to sell abroad. It's time some other currency replaced the dollar as the world's reserve currency. The euro, the yuan, the yen - whatever... * That would mean companies that manufacture in the US. P&G has no problem manufacturing for the Chinese market in China, of course, but most smaller American companies don't have that option. Not to mention that US workers don't get many jobs from P&G's operations in China. |
| Posted by: Zhang Fei 2007-11-18 14:41 |
| #14 This decline in the Dollar was inevitable once George Bush went on a crusade against Islamofascism. All the dictatorships in the ME have huge amounts of dollars in reserve and no intention of becoming a democracy. Trashing the Dollar may make them poorer, but it weakens our democracy effort and keeps the dictators in power a little longer. This trend has been exacerbated by China who's main policy since Tienamin Square has been "Build a Chinese Wall against Peaceful Evolution". Simply stated, in dictatorships political considerations trump economics every time. Our currency is going to be undervalued until these guys fall, and that may be sooner rather than later. Al |
| Posted by: Frozen Al 2007-11-18 14:23 |
| #13 The value of the dollar is set by the market. The market is made up of the geniuses who bought all those derivative securities based on sub-prime loans. The market is motivated by two and only two things; fear and greed. Greed motivated the EUro-investors to buy those derivatives and greed for growing exports led Bush and Paulson to talk down the dollar. A tipping point was reached, probably when the Fed dropped rates the second time and confidence that the US monetary authorities had any interest in preserving the dollar as a store of value was seriously eroded. Ultimately markets work on confidence that each party can properly evaluate the risks and rewards of a transaction. When that confidence is undermined, rationality goes out the window and fear and panic take over. That is what nearly happened. Bush and Paulson have publicly backed a strong currency. The Fed won't be dropping rates. This may stabilize things but these guys have shot their credibility. To know what is really going on you have to know who is buying and who is selling. And sometimes that can be very difficult to know; not only because market movers try to disguise their moves. I am sceptical that the Saudis were behind this run on the dollar. It is hard to see what they would gain from instability and the destruction of the dollar as the world's currency. They've made lots of money off America in Democrat and Republican administrations. They've bought the best State Department we can staff. The Chinese, and their friends around the world, however, have a lot to gain by attacking our financial hegemony at the same time that we seemed to be recovering some of our reduced military hegemony. Further, the Chinese have not done nearly so well under the Bush administration as they did under Clinton. They seem likely to have financed the Clintons for a long time. Should Hildebeast become the nominee and the election be at all close, I would not be surprised to see another run at the dollar next October in an effort to tilt the election Hildebeast's way. In that case my suspicion that this was a test run by them will be confirmed. |
| Posted by: Nimble Spemble 2007-11-18 13:13 |
| #12 I blame this whole clusterfcuk on university educations. This great need to be like everyone else has led the financial industry down the slippery slope. Today's grads are taught to think one way and one way only. Back in the 1990s, every one of the 50 states had budget surpluses, yet none saved a penny, and all have increased taxes sinse then. SHEEP ! Sheep following along without thought, without long range plans. Show me a man with a diploma, and I'll show you a fool looking for a line to stand in. Yesterday's captains of industry and banking would have reaped a sorry harvest of these airheads. They can't create a stable investment, because they can't determine what works and what doesn't work. After all, that would be judgemental. And, when you can't be judgemental giving loans, then everyone gets too much for too little, and we all go bust together. Well, go bust if you want, but those of us who can think outside the university confines will own our houses and make our payments, and live within our means. And home school if we know what works best. |
| Posted by: wxjames 2007-11-18 13:05 |
| #11 We are living in an age where the value of the dollar is artificially influenced by several thing, some of them already mentioned above. Add artificial run-ups in commodity prices due to speculation and a credit market saturated with sophisticated trading instruments that disguise real risk, and you got a game where no player has any real idea what is actually going on. |
| Posted by: M. Murcek 2007-11-18 12:21 |
| #10 In this little game of beggar-thy-neighbor watch the Euro scream first, I hear little noises already. Boeings running a 15% off sale on Dreamliners. |
| Posted by: Thomas Woof 2007-11-18 09:43 |
| #9 Sorry, that was a response to bigjim-ky |
| Posted by: lotp 2007-11-18 09:25 |
| #8 Of course the world is shunning the dollar - inflation rates of 6000% a year will do that. Oh, you don't mean the Zimbabwe dollar? Oops. |
| Posted by: Glenmore 2007-11-18 09:24 |
| #7 True - but there are relative gains and losses in holding securities for one or another currency. Many US consumers have indeed been imprudent in their choices and a whole lot of finance people have improved their own wealth as a result. But there are bigger structural issues going on right now. Among them is the huge distortion created by China's unwillingness to let the Ren find its natural market value. Whether or not the US could in fact influence the value of the dollar right now, there's a game of Chicken going on with China. The Chinese amassed dollar securities but kept their currency artificially low in order to continue to export heavily. The low dollar calls their bluff. Unfortunately, in games of Chicken it's not uncommon for one of the players (or both) to end up crashing. The Chinese economy is indeed more fragile than ours. But if the Saudis dump the dollar for oil sales, all bets are off. We have GOT to stop transferring wealth to the oil producers. |
| Posted by: lotp 2007-11-18 09:24 |
| #6 It strikes me that these stories tend to be PUSHING the idea rather than reporting it. When black markets and drug dealers start refusing dollars, then there's a problem. |
| Posted by: Rob Crawford 2007-11-18 09:17 |
| #5 Anyone ever heard of the FOREX market? There is no such thing as being "stuck" with dollars, or yen or anything else nowadays. Absolutely no such thing. |
| Posted by: bigjim-ky 2007-11-18 08:12 |
| #4 Verlaine, right on the mark (err, dollar). In my view, any European based instruments are relatively safe for about 4 years, but not beyond that time frame. In fact it may seem like a risky proposition, but I'd buy USD while they are cheap like there's no tomorrow, if you have funds avaiable in other currencies or instruments based on other currencies. |
| Posted by: twobyfour 2007-11-18 04:17 |
| #3 Nonsense. Even the comment by the Harvard guy is dubious - currency value depends on economic vitality plus fiscal situation, and there's no sign the US is losing its leading economic role. The Roett comment is classic BDS academic idiocy. Remember, the only issue that other actors care about in regard to Bush is the federal budget situation - so if Roett is saying that fiscal incontinence is the problem, it's Bush's worst failing but something even worse with his opponents. This is almost entirely a discussion of what in the long term is only a short term market situation. The status of the dollar as the reserve currency (or oil currency) won't change. China SHOULD diversify their foreign currency holdings - common sense, especially with the US showing so little budget discipline. The US currency is valued partly for the confidence holders repose in US financial and governmental institutions. With respect to financial matters, that confidence is unchanged. Market logic dictates diversification, but the closest proxy to the "risk-free" financial instrument is, and will remain, US government bonds. That, plus the continuing general economic dominance of the US, mean the dollar will be just fine in the long run. I'm much more concerned about European-based stocks I own through mutual funds. With a few exceptions, Europe may not be a place to have your money as various demographic and cultural/economic factors kick in. |
| Posted by: Verlaine 2007-11-18 04:02 |
| #2 I'd love to see the results of a survey that tested for the recognition of an old-style C-Note. I'm confident that a Pre-Monopoly-Money hundred dollar bill can still get a person just about anything they want on the street, no matter where they are in this world. |
| Posted by: Zenster 2007-11-18 03:30 |
| #1 A little too much triumphalism from lefty rags whose own financial houses are in ruins - they'd like to take the US with them. We'll see. |
| Posted by: Seafarious 2007-11-18 03:23 |