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.