The Decline Of The US Dollar

[.OrgOwner]

This is ugly folks, once the currency starts to devalue imports go up, last time I checked Honda was made in Japan so it's going to impact motorcycle riders (unless of course your on Harley )

We know the credit crisis is a clear and present threat to the global economy. But its most important long-run legacy may not be economic, but geopolitical.
I was reminded of that possibility when reading a recent analysis by Professors Menzie Chinn at the University of Wisconsin and Jeffrey Frankel of Harvard*. They ran a simulation showing that the euro would replace the dollar as the world’s largest reserve currency within the next 10 or 15 years. Their analysis is not based on this crisis. But the crisis could easily accelerate the trends they have identified.
Do not dismiss this research as some anti-dollar propaganda. Professors Chinn and Frankel started with the opposite notion – that the euro would not overtake the dollar for a long time. After all, the world does not change reserve currencies very often.
Sterling held pole position until the second world war, but lost it because of the UK’s imperial overreach. The US economy had already overtaken that of the UK in the 1870s. One of the factors that delayed the dollar’s rise was lack of a sophisticated financial sector, which did not develop until the establishment of the Federal Reserve System in 1913. Global reserve currency status is due to many factors such as the size of the economy, the country’s share in international trade and the depth of the financial markets. Inertia is another. If yours is a global reserve currency today, it is likely to be one tomorrow too. But this works only up to a point – a tipping point.
Professors Chinn and Frankel state two underlying reasons for the decline in the international role of the US dollar. The first is persistent current account deficits combined with a long-term decline in the dollar’s exchange rate – and perhaps imperial overreach, too. The second is the emergence of a genuine alternative to the dollar. Neither the yen nor the D-Mark had a realistic chance of replacing the greenback. But the euro is a real alternative. The eurozone economy is almost as large as that of the US and may surpass it as it continues to enlarge. London is the eurozone’s de facto financial centre, even though the UK itself has not adopted the euro. Also, the eurozone bond markets are now almost as deep and liquid as their US counterparts.
The projected speed at which the dollar will lose its predominant position as a global reserve currency obviously depends on your assumptions. The work of Professors Chinn and Frankel shows that this could happen shockingly fast. Some of those trends are accelerating right this minute. The reckless monetary policy of the Federal Reserve has speeded up the dollar’s decline and caused a rise in inflationary expectations. I would expect US inflation to pick up significantly once the present recession ends. Future inflation will weigh heavily on the global role of the US dollar.
An immediate consequence of high inflation is that many developing countries will find it harder to maintain their dollar pegs. They may be reluctant to drop them now but there will come a point when the rise in inflationary pressures becomes unbearable. If and when they drop their pegs, they will almost certainly rebalance their reserve portfolios as well.
Another factor that pushes in the same direction is the weakening of the US financial sector. This has been a crisis of Anglo-Saxon transaction-based capitalism. Not too long ago, it was considered to be vastly superior to the eurozone’s old-fashioned relationship finance. I doubt that in a few years’ time people will continue to assess the relative strengths of the Anglo-Saxon and continental European financial systems in quite the same way. I would also expect the eurozone economy to withstand the economic shocks of the credit crisis in relatively better shape.
Inertia means that the euro will not overtake the dollar any time soon. At present the euro only accounts for a little over a quarter of world reserves, against the dollar’s share of two-thirds. But to keep the euro down forever, you would need to rely on some rather far-fetched conspiracy theories. One such theory says that foreign central banks collude to hang on to dollars to protect the value of their holdings. It does not work that way. The network externalities that have favoured the dollar in the past could just as easily favour the euro in the future.
The potential geopolitical implications of such a projected shift are immense. For a start, the US will lose its exorbitant privilege – the ability to achieve permanently higher returns on foreign assets than the returns paid to foreigners who invest in the US. The dollar will suddenly cease to be “our currency, and your problem”. Influence in international financial institutions will wane. Losing the dollar as the world’s leading international currency not only leads to a loss of political power. It constitutes loss of power.
There is little politicians can do to prevent such a seismic shift. I suspect the US political establishment is not yet aware of what is going to hit it. Then again, the same can be said of European political leaders, who have not given us any hint yet that they are ready to deal with the responsibilities that come with running the world’s leading currency.

Why the euro will soon replace the dollar as the world's reserve currency

The Pound is now give or take a pence or two, the same as the Euro now, also.. two major currencies going down the pan..

The local exchange places are giving you 1.01 euro to a pound - this time last year it was 1.43!!!

Or now 1.47 dollar to a pound, last year - 2.03 dollars to a pound!

I hate my job, but have to glad I'm in insurance as nobody (in the sector I'm in) can do business without it.

Was going to order a couple of bits from the US, but it doesn't look that good of a deal any more.

And like you say, its only going to get worse

[.OrgOwner]

[.OrgOwner]

I had another peek today, it's not getting any better.

Two years ago I was saying to some American friends they should buy into the Yen. I was told I was nuts. Well, if they had they'd be looking a lot rosier than they are now.

Well our dollar almost reached parity with the US dollar last year, then it fell hard and went do to about 60c. Thats a huge drop in a few months.

C'mon guys don't be overreactionary here. The dollar falls first and rises first. That's all that needs to be said.
How about Itally removing themselves from the Euro???
It's just like the stock market. If there are news items about it, you're too late.
Just watch the Yen, Euro and Yuan fall like a rock in the next 9 months...

[.OrgOwner]

Originally Posted by dicknose

Well our dollar almost reached parity with the US dollar last year, then it fell hard and went do to about 60c. Thats a huge drop in a few months.

The Aussie is now over 71 cents against the US and climbing, I suspect it is still undervalued quite a bit.

Originally Posted by nedro

C'mon guys don't be overreactionary here. The dollar falls first and rises first. That's all that needs to be said.
How about Itally removing themselves from the Euro???
It's just like the stock market. If there are news items about it, you're too late.
Just watch the Yen, Euro and Yuan fall like a rock in the next 9 months...

Of course we are in volatile times, but I do wonder whether the dollar will bounce back in a meaningful way within the next two years. I don't think so because I think there's too much that needs to be done first.

If all were to stay as it is outside the US, the Yen would continue to climb until it could no longer support its own weight and then it would collapse in on itself. In the beginning that would help Japanese manufacturers because exports would be cheaper. But in the long run they would have to invest in another currency just to make ends meet. That could be the beginning of the yo yo effect.

The biggest problem the euro has at the moment is too many chefs. At least with the dollar the US has a chance to move in a positive way if the president's advisors stop long enough to see that the perceived wisdom isn't what's going to help. They are going to have to make some unpalatable decisions, which may mean no second term.

[.OrgOwner]

I think if you take a look at the "gold" prices that tells a bit of a story, when the US is on the slide people are looking for other safe places to park their money.

Originally Posted by .OrgOwner

I think if you take a look at the "gold" prices that tells a bit of a story, when the US is on the slide people are looking for other safe places to park their money.

Yes, but for how long? As with every stock at the moment, once people get wind of it being a safe place they all start buying in (price goes up). Then those who were already in start selling in big numbers and quickly to realise their profit. Because the market is so volatile, the minute any significant drop in price is seen due to a flood of sales in the market, investors will leave in their droves - and the price will slump.


The yo yo effect then really starts kicking off.

Originally Posted by .OrgOwner

The Aussie is now over 71 cents against the US and climbing, I suspect it is still undervalued quite a bit.

Long bloody way from mid 90s.