The falling US dollar is giving ammunition to the critics of the Obama administration and fuelling broader concerns about the potential erosion of AmericaÂ’s reserve currency status.The depreciation of the US dollar is sparking growing jitters among critics of the Obama administration over the potential loss of AmericaÂ’s reserve currency status. Economists point out that a declining dollar could prove a boon to the US economy in the absence of credible anxiety over inflation.
Republican politicians have highlighted the dollar’s slide as evidence of waning US power. Sarah Palin, the former vice-presidential Republican candidate, on Wednesday sought to link the dollar decline to rising US indebtedness and dependence on foreign oil. “We can see the effect of this in the price of gold, which hit a record high today in response to fears about the weakened dollar,” she wrote on her Facebook site.
With other nations also expressing concern about dollar weakness, the administration is at pains to emphasise that it understands the responsibilities that come with issuing the worldÂ’s reserve currency and will live up to them.
“It is very important to the United States that we continue to have a strong dollar,” Tim Geithner, Treasury secretary, said at the weekend. “We recognise that the dollar’s important role in the system conveys special burdens and responsibilities on us and we are going to do everything necessary to make sure we sustain confidence.”
Angst about the dollar – which has fallen 11.5 per cent on a trade-weighted basis over the past six months – extends beyond ideological conservative political circles.
Last week, Robert Zoellick, president of the World Bank, warned that “the United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency.”
Much of todayÂ’s debate echoes the traditional political response in the US whenever the currency depreciates. But it is now accompanied by warnings from AmericaÂ’s creditors, many of which are widely rumoured to be eyeing large purchases of US real assets such as property and companies.
While the latest swoon in the dollar is attracting attention, analysts say that it needs to be put in context. In trade-weighted terms, the dollar is essentially back to where it was at the start of the financial crisis on August 9, 2007, according to Federal Reserve data.
While the price of gold has gone up, financial market measures of inflation expectations have not. The yield on the 10-year note was trading at 3.18 per cent on Wednesday. Indeed, analysts say that the dollarÂ’s slide stems more from investorsÂ’ growing appetite for risk and the prospects of interest rate rises elsewhere.
“The first order reason for the decline in the dollar has been the normalisation of markets,” said Ken Rogoff, a Harvard professor and former IMF chief economist. “The financial crisis probably has brought forward the day when the dollar is no longer dominant – but maybe from 75 years to 40 years.”
