-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

The U.S. dollar may have found support this week but the USD index remains at a 14-month low.

The impact of the financial crisis in drawing buyers to the “safe-haven” dollar has in effect been almost cancelled out by the healing in risk appetite. The dollar looks to have re-embarked on the downtrend that had been in place for more than two years prior to the start of the financial crisis, only now the U.S. fundamentals have arguably deteriorated further.  

Slow growth and a hefty budget deficit are likely to hamper the attraction of the dollar for some time.  That said, there is a huge invested political interest in ensuring that any further declines in the dollar remain orderly.

The weakness of the dollar has already prompted some Asian countries such as South Korea and Taiwan to intervene in order to prevent the appreciation of their currencies impacting competiveness.  This action can be viewed as a protest against the renminbi-dollar peg and a guard against losing competitiveness to China.

As the euro rises against the dollar, it is also rising against the renminbi and — spurred on by the actions of other Asian central banks — the chances are that it will continue to appreciate against a host of other Asian currencies.

Since the start of last year, the euro has risen by 37 percent against the South Korean won.  In recent comments, French Finance Minister Christine Lagarde stressed that she did not want to see the euro bearing the brunt of the downward adjustment of the dollar. 

The U.S. is still the Eurozone’s second largest trading partner after the UK suggesting that a move above EUR/USD1.500 cannot be welcome, but the pegging of the renminbi versus the dollar makes the downward adjustment of the dollar a far more painful experience for the Eurozone.

This is not the only objection to the renminbi-dollar peg.  The traditional objections relate to the huge US and Chinese imbalances which are evident in the ability of China to build-up huge foreign currency reserves largely denominated in dollars. 

Domestic policies which could lessen savings and promote domestic consumption are the usual prescriptions offered to China.  Higher government spending on social systems such as education and healthcare could offer part of a solution as this should limit the amount of savings viewed as necessary and boost consumption. 

Clearly a weaker exchange rate could be a significant part of the solution since this should limit export growth and promote demand for overseas goods.

Clearly China can not rush a move to a flexible exchange rate regime.  The Chinese authorities understandably fear that a quick move could prompt capital flight and undermine its banking system.  A fully convertible, flexible exchange rate must be a long term goal rather that a quick fix solution but China can expect to feel increased pressure to adjust its currency peg versus the dollar.

The renminbi and the dollar are of course linked in more ways than one.  China’s exchange rate regime can be blamed for exacerbating global imbalances which have undermined the value of the dollar.  It is ironic then that China, along with other creditor nations, now has an interest in supporting the value of the dollar in order to avoid a sharp depreciation in the value of its assets.  

Theoretically, the sudden, sharp rise in the U.S. budget deficit towards 11 percent of GDP this year, Obama’s difficulties in making progress with healthcare reform and projections for below trend U.S. economic growth at least through 2010 should be sending bond investors to run for the hills. 

The maintenance of good demand from overseas central banks for U.S. Treasury paper this year suggests that creditor central banks are continuing to play their part to ensure that the decline of the dollar remain orderly.  A move to EUR/USD1.55 may be further away than it seems.

Paul Taylor is a Reuters columnist. The opinions expressed are his own.

The financial crisis has rallied support for euro adoption in many European countries outside the currency bloc, yet in Britain the discussion is so far confined to a few voices among the policy elite.

The politics of the issue remain as fraught as ever, and Britons appear no more willing to lose monetary sovereignty in a recession than they were in the boom years.

For most of the last decade, as the flexible, finance-driven British economy was roaring ahead of its sluggish continental cousins, the economic and political case for joining the single European currency was hard to make.

A Eurosceptical tabloid press helped scare former Prime Minister Tony Blair out of his initial intention to lead Britain into the euro. The 2003 Iraq war drained the political capital he would have needed to win public support.

But now that Britain faces the deepest recession of any major economy next year, arguments for keeping the pound have become harder to defend.

“The crisis has taken the hubris out of the debate. It’s now possible to mention the euro again in British politics without getting a complete ‘No’,” said Lord Wallace of Saltire, European affairs spokesman of the pro-EU Liberal Democrats.

The City of London financial district has been humbled by bank crashes, government bail-outs and a vicious credit squeeze. The housing market is collapsing and the pound has fallen 21 percent against a basket of currencies in 15 months.

“PRAGMATIC SELF-INTEREST”

The establishment think-tank Chatham House was first to call for a rethink in a September report entitled: “A British agenda for Europe; designing our own future.”

A panel of policy wonks stopped short of urging London to join the currency but said: “The extension of euro membership to the vast majority of EU member states in future years will mean Britain is excluded in practice from deeper intra-EU economic consultation and coordination, including in areas of significant national interest such as financial market regulation.”

While London should not join just to avoid losing influence in Europe, “under future national or global economic conditions, the government may need to appeal to the pragmatic self-interest of the British electorate over giving up the pound”, it said.

Denmark, which voted against the euro in 2000, is feeling the political and economic cost of having opted out and weighing a referendum on joining. If it does, Sweden may well follow.

Central European governments led by Poland were quick to conclude they could no longer afford to question the merits of euro adoption, and are now racing to meet the criteria for joining the currency bloc as soon as possible.

The euro zone may not be perfect, but it’s warmer inside.

Will Hutton, director of the left-leaning Work Foundation, argued this month that Britain now resembles a gigantic hedge fund and sterling’s sharp fall could turn into a rout.

“Suddenly membership of the euro — politically toxic — is beginning to look a very attractive escape route,” he wrote in the Observer newspaper.

Joining the euro at the current devalued exchange rate would make British exports competitive, enable reindustrialisation and underwrite the City’s huge borrowing needs, Hutton argued.

COMPETITIVE DEVALUATION

Opponents of euro membership say a floating currency has enabled Britain to avoid painful adjustments in wage costs by depreciation, first when sterling was ejected from the European Exchange Rate Mechanism in 1992 and again this year.

“What is the point of enduring the years of economic weakness needed to achieve the 15 per cent improvement in competitiveness against the euro zone secured, painlessly, in the past year?” economic columnist Martin Wolf asked in the Financial Times.

Yet the idea that Britain can get away with a competitive devaluation every 15 years to wipe the slate clean from the excesses of its bubble economy sits uncomfortably with traditional notions of fiscal rectitude.

It also suggests that British membership might be more of a threat to the stability of the euro zone than joining the euro would be to Britain’s monetary sovereignty.

Prime Minister Gordon Brown, who faces a general election within 18 months, has sought to avoid a public debate on the euro. As finance minister for a decade, he had a hand in blocking Blair’s ambition for euro membership by devising five economic tests that were never met to his satisfaction.

Opposition foreign affairs spokesman William Hague said in an interview that the national sovereignty argument against the single currency remained stronger than any short-term expediency case for joining in a crisis.

Things may have to get still worse before the British conclude they would be better sharing monetary sovereignty with France and Germany than risking the fate of Iceland or Hungary.