American Gangster's Wad of Euros Signals Losing U.S. Confidence
2007-11-14 00:14 ( New York )
By James G. Neuger and Simon Kennedy
Nov. 14 (Bloomberg) -- ``It may be our currency, but it's
your problem'' was Treasury Secretary John Connally's taunt when
the U.S. unhooked the dollar from the gold standard in 1971,
unilaterally rewriting the rules of world business in America 's
favor.
Now the world is taunting back. Almost four decades after
the U.S. tore up the monetary arrangements that governed the
post-World War II international economy, the dollar's fall from
grace amounts to a tectonic shift in the global hierarchy. This
time, the U.S. currency and the capitalism it represents are on
the losing side.
After declining in five of the last six years, the weakest
dollar in the era of floating currencies reflects a period of
diminished U.S. political and economic hegemony. Whoever wins
the White House next year will confront two unpopular choices:
Accept the fall in U.S. clout and the rise of new rivals, or
rein in record public and consumer debt that the rest of the
world no longer wants to bankroll.
``What we're seeing is a very broad rebalancing of economic
and political power in the world,'' says Jeffrey Garten, a Yale
School of Business professor who was the Commerce Department's
undersecretary for international trade in the Clinton
administration. ``The scales are moving, and they're moving
quite fast.''
The dollar blues have migrated from the halls of central
banks to images of rap musicians.
In a video for the movie ``American Gangster,'' hip-hop
maestro Jay-Z thumbs through a wad of 500-euro notes on a night
of cruising through the concrete canyons of New York , a city
where the euro isn't legal tender.
Nixon Genesis
The latest tailspin was triggered by the ascendance of
China and India , growing confidence in Europe 's common currency,
record American debt and trade gaps, London 's challenge to New
York as a financial center and a two-year housing recession in
the U.S. For the first time, economists are raising the once-
improbable specter that the dollar's monopoly as the world's
dominant reserve currency is under threat.
Like the British pound, its predecessor as the world
currency, the dollar has fallen victim to widening burdens
overseas and economic stresses at home. The slippage began in
1971 when President Richard Nixon, in a stopgap move to cope
with the inflationary financing of the Vietnam War, halted the
exchange of dollars for gold.
Since then, currency markets have ebbed and flowed. High
Federal Reserve interest rates and a flood of Japanese capital
to finance Ronald Reagan's deficits bred the ``superdollar'' of
the mid-1980s. The Internet-led productivity boom lured
investment to the U.S. in the late 1990s. The most recent period
reflects a world awash in other options.
Permanent Depreciation
``Part of the depreciation is permanent,'' says Harvard
University professor Kenneth Froot, who has been a consultant to
the Fed. ``There is no doubt that the dollar must sink against
periphery currencies to reflect their increase in
competitiveness and productivity.''
The Fed's trade-weighted major currency index bottomed at
71.11 on Nov. 7, the lowest since the era of free-floating
currencies started in 1971. Against the yen and European
currencies, the dollar is now worth about a third of what it was
in the days of fixed rates.
One of the main U.S. exports since then has been the dollar
itself, in exchange for foreign capital to finance trade
deficits and a national debt of more than $9 trillion. While the
current-account deficit is narrowing from last year's record
$811.5 billion, the U.S. still requires $2.1 billion a day of
other people's money.
`Unstable Situation'
``We're getting into a very unstable situation,'' says
Richard Duncan, a partner at Blackhorse Asset Management in
Singapore and author of the 2005 book ``The Dollar Crisis:
Causes, Consequences, Cures.''
Such a prospect unsettles U.S. allies, and concerns are
mounting that the flight from the dollar is feeding on itself
and threatening a crisis of confidence that the next president
will have to address.
Kuwait , freed by the U.S. from Saddam Hussein's army in
1991, unhinged its currency from the dollar in May, and pressure
is building for Gulf Arab neighbors to follow suit. Qatar 's
prime minister, Sheikh Hamad bin Jasim bin Jaber al-Thani,
complained Nov. 11 that the dollar's drop is cutting oil and gas
income, leaving less to invest abroad. The United Arab Emirates
may drop the dirham's peg to the dollar, analysts said.
The central bank in Iraq , a country the U.S. military has
occupied since 2003, last month said it, too, wants to diversify
reserves away from mostly dollars.
Korean Shipbuilders
Korea 's central bank this week urged shipbuilders to issue
invoices in won, the Korean currency, and take out more hedging
policies to guard against a weakened dollar.
The dollar's share of global central banks' currency
portfolios slid to 64.8 percent in the second quarter from 71
percent in 1999, the year the euro debuted, the International
Monetary Fund says. The euro, used in 13 countries, now accounts
for 25.6 percent.
``The global reserve system is fraying; it's falling
apart,'' said Joseph Stiglitz, a Nobel-laureate economist at
Columbia University , at a Bloomberg seminar last month in Tokyo .
``The change in mindset about the use of the dollar in reserves
and the movement of the dollar out of reserves will continue to
exert downward pressure.''
Economic Dry Spell
To be sure, the latest slump -- 6.6 percent against the
euro since the end of August, 4.7 percent against the yen --
partly reflects an economic dry spell. Credit-market turmoil led
banks to cut consumer lending, bruising the U.S. economy's main
engine.
``I don't think this is a lasting phenomenon, but it will
come to a halt especially when America in a few months or at the
start of next year gets over the financial crisis,'' says Theo
Waigel, Germany's finance minister in the 1990s and an architect
of the euro.
For now, the U.S. economy is a drag on the rest of the
world. When the IMF last month trimmed its global growth
prediction for 2008 to 4.8 percent from 5.2 percent, it blamed
the U.S. , whose forecast was cut to 1.9 percent from 2.8
percent.
Two Fed rate cuts, to 4.5 percent, have tilted the trading
odds against the dollar in the near term. While the European
Central Bank has put a planned increase in its benchmark 4
percent rate on hold, investors still see European rates going
up and U.S. rates going down.
Asia Diversifies
``I wouldn't bet against the U.S. as the world's reserve
currency,'' says former Treasury Secretary John Snow, now
chairman of Cerberus Capital Management in New York . ``The
dollar markets are so deep and so liquid and the American
economy is so fundamentally advanced.''
Central banks in Asia are hedging that bet. Buoyed by the
fastest growth of any major economy and putting tight limits on
the appreciation of its exchange rate, China has piled up the
world's biggest stash of foreign currencies, worth $1.4 trillion
at the end of September.
Cash-rich governments are discovering the profit motive,
adding to pressure on the dollar as they comb the world's
markets for investments that pay more than the current 4.25
percent return on 10-year U.S. Treasury bonds.
Economists at Merrill Lynch & Co. estimate as much as $1.2
trillion in dollar holdings will shift to other currencies in
the next five years.
A warning by Cheng Siwei, vice chairman of the National
People's Congress, that China will invest in stronger currencies
triggered a recent stampede out of the dollar. China doesn't
have to dump dollars to depress the U.S. currency, economists at
UBS AG say. Accumulating them at a slower pace will have the
same effect.
G-7 Action
Ultimately, if the dollar's swoon depresses U.S. stocks or
threatens global growth, Group of Seven major industrial nations
may have to do more than issue communiqu‚s.
The last concerted international maneuver to rearrange
currency rates was in September 2000, when the G-7 sold dollars
to prop up the then-stumbling euro in a U.S. presidential
election year.
For the moment, policy makers are just talking. ECB
President Jean-Claude Trichet last week called the euro's
record-setting rise ``brutal.''
Treasury Secretary Henry Paulson trotted out the 1990s
mantra that a ``strong dollar is in our nation's interest'' --
as long as markets determine its rate. For the first time,
Paulson had to rebut concerns about the dollar's supremacy as a
reserve currency.
``At this moment I don't think that the Americans are very
disturbed,'' says former Dutch Finance Minister Gerrit Zalm, one
of the euro's founding fathers. ``Until now, the developments
are gradual with little effect on the stock exchange or long
term capital-market rates.''
``There is a loss of confidence in both the dollar and the
U.S.,'' said Riordan Roett, a professor at Johns Hopkins
University in Baltimore . ``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.''
--With reporting by Kim Kyoungwha in Seoul , Kevin Carmichael in
Washington, Kathleen Hays in New York , Massoud A. Derhally and
Will McSheehy in Dubai , and Stanley White and Kazumi Miura in
Tokyo. Editor: Murray (djm/rls)
To contact the reporters on this story:
James G. Neuger in Brussels at +32-2-285-4300, or
[email protected];
Simon Kennedy in Paris at +33-1-5530-6290 or
[email protected]
To contact the editors responsible for this story:
Riad Hamade at +49-69-92041-214, or
[email protected];
Eddie Buckle at +49-30-700106-225, or
[email protected].