Dollar Alarmism

The Economist has a highly intelligent leader on why the the recent slide in the value of the dollar is unlikely to lead to a short-term collapse. The article is a welcome corrective for the dollar alarmism of Fox News and the London Independent — the former has used the dollar’s decline as a stick to beat up on President Obama and the London paper ran a recent article that was clearly relishing the image of the U.S. being on the ropes. Of course I am pointing to it because it supports my earlier blog postings scorning the alarmism of the Independent.

Dealing with the facts, the Economist quite rightly points out: “Yields on Treasuries have not risen and spreads on riskier dollar assets continue to shrink. If investors were growing leerier of dollars, the opposite should have occurred.” The editorialist notes that a weaker dollar is what you would expect “given the relative cyclical weakness of America’s economy.” Much of the recent slide reflects a growing optimism about recovery in other economies and reverses the rush to dollars in the aftermath of the Lehman Brothers collapse in the autumn of 2008.

“The dollar will not quickly lose its reserve-currency status. The lesson of the past year is that it is still a currency to flee to, not from,” concludes the leader. Certainly there will be a long-term erosion of the value of the dollar because of the increasing economic strength of top developing nations. But a sudden collapse of the greenback’s status and its replacement as the reserve currency of choice as envisaged by the Independent is far-fetched.

More Dollar Nonsense

First, we had the breathless The Demise of the Dollar piece from the Independent’s Bob Fisk claiming that several Gulf countries, developing nations and Russia have been in ‘secret talks’ to discuss dumping the greenback. And now we have the New York Post joining in with an article announcing the dollar has lost “reserve status to the euro and yen.”

With Fisk — a journalist who has no economics background – the UK Independent didn’t even seem a jot red-faced when virtually every country mentioned denied flatly being involved in such talks. Fisk had no sources on the record and no details of where and when such talks were held. At least the New York Post had some currency traders on the record spouting off.

So what evidence does the Post’s Paul Tharp have for the claim. Well, apparently banks (which ones?) put 63 percent of their new cash in euros and yen in the past three months and Tharp says that is a “complete reversal of the dollar’s onetime dominance” when it comes to reserves.

Hmmm. So no longer the world’s reserve currency despite the fact that 62 percent of all currency reserves in central banks are in dollars?

A reality check is needed here. Yes, the dollar is going to have to share the stage with euros and yens and some other currencies in the future. This will mark a decline for the U.S. Sure, there is an evolving change in the order of power and developing nations such as China, the Gulf states, Brazil and India want more influence at international institutions and on the global financial system. And sure too there has been a long debate about pricing oil against a basket of currencies. But that is all a long way from how Fisk or Tharp write.

None of this is going to happen overnight. The last thing any of the developing countries want is a further decline of the U.S. dollar as they hold so many in their reserves. China and developing nations need an economically vibrant U.S. as a market to sell to. The U.S. will recover — so even will the UK (!) — and there will be in economic terms an even more multi=polar world — that is no bad thing for the world or the U.S.