Dollar's Decline: From Symbol Of Hegemony To Shunned Currency
By Andy McSmith
17 November, 2007
decline of the dollar, symbol of US global hegemony for the best part
of a century, may have become so entrenched that some experts now fear
it is irreversible.
After months of huge and
sustained turmoil on the money markets, lack of confidence in the world's
totemic currency has become so widespread that an increasing number
of international traders are transferring their wealth to stronger currencies
such as the euro, which recently hit its highest level against the dollar.
"An American businessman
over here who is given the choice would take anything but the dollar,"
David Buik of Cantor Index said yesterday. "I would want to be
paid in yen, and if not yen then the euro or sterling."
Matthew Osborne, of Armstrong
International, added: "The majority would say sterling. There are
a few dealers in the City who may take the view that they'll take dollars
now, while they're cheap, and hold on to them for 12 months.
"But the problem is
so serious that there are people who in July or August might have been
thinking, 'I'm paid in dollars, how annoying' for whom it's now a question
of, 'Do you have a job; do you have a bonus?' "
The collapse of the sub-prime
mortgage market in the US, which is fuelling the dollar unrest, has
already brought down one British bank, Northern Rock, and has forced
others to declare vast losses. Yesterday, just as it appeared that the
dollar might have finally reached its floor, there was another warning
that the sub-prime crisis is going to get worse. The US Treasury Secretary
Henry Paulson, warned an international business summit in South Africa:
"The sub-prime market, parts of it will get worse before it gets
better." Huge numbers of US homeowners are still cushioned by introductory
interest rates set when they took out loans in 2005 or 2006, he said.
When these introductory offers run out, their interest payments will
increase, setting off another wave of defaulting and repossessions.
And the dollar is enduring its rockiest spell in recent memory.
Kenneth Froot, a Harvard
university professor and former consultant to the US Federal Reserve,
warned yesterday: "Part of the depreciation [of the dollar] is
permanent. There is no doubt that the dollar must sink against periphery
currencies to reflect their increase in competitiveness and productivity."
Professor Riordan Roett,
of Johns Hopkins University in Baltimore, told Bloomberg News: "There
is a loss of confidence in the dollar and the US. 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." As well as reaching its lowest level against the euro,
which has been trading at more than $1.47, the dollar has also fallen
to its lowest level against the Canadian dollar since 1950, sterling
since 1981, and the Swiss franc since 1995.
Its plight was made still
worse by a jarring signal from China that it was switching to other
currencies. Cheng Siwei, vice-chairman of the Standing Committee of
the National People's Congress, told a conference in Beijing: "We
will favour stronger currencies over weaker ones, and will readjust
The warning was reinforced
by a Chinese central bank vice-director, Xu Jian, who said the dollar
was "losing its status as the world currency".
China has stockpiled £700bn
worth of foreign currency, and has only to decide to slow its accumulation
of dollars to weaken the currency further. Last month, in a humiliating
turn of events, the central bank in Iraq, four years after the United
States invaded, stated that it wished to diversify reserves from a reliance
Korea's central bank has
urged shipbuilders to issue invoices in the local currency and take
precautions against the weakened dollar, and three of the world's big
oil exporters, Iran, Venezuela, and Russia, are demanding payment in
euros rather than dollars. Iran insisted that Japan should make all
its payments for oil in yen, rather than dollars.
Warren Buffet, who is reputedly
the richest man in the world, was asked on the US network CNBC last
month what he thought was the best currency in the world to own now.
He answered: "Not the US dollar."
The Wall Street Journal ran
an online poll asking people which currency, they would prefer to be
paid in. The euro came top, ahead of sterling, with others such as the
Canadian dollar, yen and Swiss franc trailing far behind. One respondent
wrote: "Being an expat in Europe with a European employment contract,
I am paid in euros, and happy to get paid in euros, and shop in the
US, just as long as the cycle lasts through my retirement, so I can
pick up pension in Europe and retire in the US."
The Federal Reserve has cut
interest rates twice since September to revive the US economy, but the
cuts – combined with the possibility that more were on the way
– made the dollar less attractive to investors. Yesterday, it
recovered slightly when one Federal Reserve banker, Randall Kroszner,
dampened speculation about further interest rate cuts, saying that rates
were low enough to get the economy through a "rough patch".
Problems with the greenback,
combined with cheap air fares, have encouraged more Britons to go shopping
across the Atlantic. British tourists spent £785m in New York
last year, the city's marketing and tourism organisation said yesterday.
There were 1,169,000 visitors to New York from the UK in 2006, with
54 per cent going for four to seven nights and 31 per cent staying for
two to three nights. They spent an average of £112 a day. The
average age of the UK visitor is 40.
Christopher Heywood, director
of tourism PR for NYC & Company, said he expected the dollar crisis
to attract yet more British shoppers. "The savvy traveller who's
coming here for the shopping can really get a bargain. They're coming
with one suitcase and leaving with two or three," he said.
"We have people coming
over here even for weekend trips to shop for the famous brand names.
People are coming for the department stores that everyone around the
world knows, but also for the boutique stores out of the centre of Manhattan,
anything from Madison Avenue and Fifth
© 2007 Independent News
and Media Limited
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