“Dollar demise”: Inexorable but not sudden

October 6, 2009

– Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own –

LONDON (Reuters) – An article in Britain’s Independent newspaper on Tuesday rightly attracted a lot of market attention with its provocative heading “The demise of the dollar.” While subsequent and almost co-ordinated denials from numerous capitals have taken the steam out of the story, the dollar’s role is again under scrutiny.

While the geopolitical realities of the Middle East would arguably rule out the re-pricing of oil in non-dollar currencies at this time, that may change in the future.

Alarmist conclusions that the dollar is on a swift road to ruin are wide of the mark. The road will be long and at its end the dollar will not be ruined, but it will be less important.

The dollar remains, however, on the back foot as the story resonated with a market that was already looking for an excuse to unload the greenback. Sovereign reserve managers, working for future generations, will have taken note. These stories add to the uncertainty of holding vast sums of dollars in trust.

It has long been the fate of reserve currencies to depreciate and be displaced. Global reserve currency status has always encouraged the beneficiary nation or empire to live beyond its means, safe in the knowledge that the rest of the world must hold its currency to pay for goods and commodities. The Roman dinar, the Spanish reale and most recently the British pound are all examples of currencies that have gradually lost their reserve status in this manner.

The key point is that the process is gradual. Displacement occurs in baby steps, small incremental developments which eventually create an unstoppable momentum. When the European Community first posited the idea of the single currency, the markets (particularly in London) sneered. Yet the euro was born and has prospered.

The dollar is entering a process of critical examination. This will take years, probably decades. Sterling retained significant world reserve status throughout the first half of the 20th century, despite clear signs economic primacy had shifted to the United States and despite the crushing financial weight of participation in two world wars.

One newspaper article is not a game-changer, but it is a reminder that the dollar’s position is under the microscope.

The market remembers only too well the suggestions of China’s Central Bank Governor Zhou Xiaochuan in March 2009. He said then that the world should consider adopting the Special Drawing Right, a basket of dollars, euros, sterling and yen, as a super-sovereign reserve currency.

The Chinese suggestion was a baby step toward change but the U.S. reaction was telling. Treasury Secretary Timothy Geithner said he had not read the proposal but added, “As I understand it, it’s a proposal designed to increase the use of the IMF’s Special Drawing Rights. I am actually quite open to that suggestion.” A masterful piece of political deflection but the market recognized the Chinese intent.

Even more recently, in September, the United Nations Conference on Trade and Development issued a report calling for a new global reserve currency.

It’s like the dripping of a tap. Across the world, institutions, governments and the media are wearing away at the dollar’s dominance. Central banks managing billions of dollars of reserves are not immune to these incremental developments.

In the past, Japanese officials characterized the best moment for intervention to be when they could “go with the wind.” In the current debate, reserve managers will consider that a light breeze is blowing against the dollar. They will make a measured and appropriate response. Marginal adjustments in reserves would increase the non-dollar component.

The Independent story may have been denied but it chimed with the market. It wasn’t the first such story and it won’t be the last. With the United States perceived to be living beyond its means and facing the challenges of rapidly rising economic and political rivals, the debate will continue. But it will be a long, long debate, and the effects on the value of the dollar will be incremental, not precipitate. To paraphrase Mark Twain, rumors of the dollar’s sudden death have been greatly exaggerated.

(Editing by Nigel Stephenson)

32 comments

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US deficit spending can be controlled in the future, the spending is not set in stone. Has anyone seen the Debt to GDP of the Euro nations, UK, Japan, Sweden. These currencies are already where the US dollar is supposed to be headed ten years from now. Yeah, sign me up for those currencies.

I think the best thing that could happen is for the dollar to fall in value. It may just help Americans get back to work and get the trade balance back in line. I do feel terrible that the easy money policy in America over the past 25 years really is hurting producing countries who thought that there was sustainable growth. I say make the drastic reductions to the dollar, it would only bring manufacturing and industry back to the US. People can’t afford even the cheapest goods if they dont have jobs, and i can’t affors to pay the increased tax burden to support these people. Six or 1/2 dozen of the other here. I pay more in taxes, or I pay more for my goods and Americans get back to work. I choose the latter.

Posted by Patrick Sunseri | Report as abusive

The Bush Administration’s long and mounting deficits (National, trade, and moral) have really cemented the demise of the dollar.
(See: http://www.lafn.org/gvdc/Natl_Debt_Chart .html )

For 8 years they continually ran up record deficits, selling debt to the world – the Chinese in particular. (While the current administration also has even larger debts, this is to try to revive an economy devastated by the Republican disastrous policies.)

One thing about the article to note: How long did it take for the Roman Dinar to fall? and then the Spanish reale? and then the pound? Each one was swifter than the previous. And so the demise of the dollar will be swifter still.

(Not that there were not other causes facilitated by both Republican and Democratic administrations…)

Still, I believe that history will show that the Bush administration initiated a complete capitulation of economic supremacy to the Chinese.

Posted by jmmx | Report as abusive

Nothing is ‘sudden’ these days, it takes time to unwind. Why the need for a Reserve Currency in any case ? Why not consolidate currencies to, say, ten (10), then we will be on a decimal standard, so to speak. Janice is correct, have either a ‘standard’ or a currency, you can’t mix gold with black gold (oil) and currencies, it is an invalid premise. I would even propose a platinum or silver or iron or coal or copper standard, as long as we stop fighting, cheap talking and actually make an impact.

Posted by Gaspard | Report as abusive

I think the declining dollar will be a disaster for retiring baby boomers. Most investment advisers suggest over half of your retirement account should go into government bonds when you are near retirement. A declining dollar and inflation will eat away at our nation’s retirement savings, while Social Security goes bankrupt.

Posted by Dude | Report as abusive

I don’t think there is particularly anything special about British sterling to merit its inclusion with the dollar, euro and yen. If a broad mix of currencies is wanted then include with sterling others: Swiss francs, Canadian dollars, others? (a mix of first world trading nations with varied economic bases — manufacturing, services, commodities. To early to include Brazil and other emerging markets but their day will come.

Posted by Mike B | Report as abusive

Gladly to note that, many comments were received for this article.
I have already written comments ,stating that ,some, recent economic power nations are raising issues on replacing !Dollar! as a world currency.
The above questions and discussions were in air and in print.
I think that,Reuters had published my comments.
That may not be in immediate future.
But possibilities are very high in future decades.
Now, China, India, Brazil, Russia and South Africa is in very comfortable positions in economic,GDP,Per capita income, and in exports.
Whereas, America has come out from their shell.
Many Americans are jobless, her exports are not encouraging.
As per astrological prediction on economic subjects,Some other world noted currency will be in world trade and commerce.
There is a general adage says that, Nothing is permanent,All are subject to change at any time.
This proverb may be applicable to change,acceptance of new currency in world markets.

It is funny how much Hot Air is Ventilated in this Dollar is so bad, yuck!.

But yet everyone uses it, I think it has alot to do with globalization and greed mixed with anti americanism, the new trend of dumping the worlds problems on somone. Even Obama said dont expect America to fix the worlds problems.

The dollar talk is just a fish and chips lunch topic for journalists.

Posted by Ian | Report as abusive

just to correct Patrick Sunseri
(Has anyone seen the Debt to GDP of the Euro nations, UK, Japan, Sweden. These currencies are already where the US dollar is supposed to be headed ten years from now).

Debt to GDP in 2008 (Data: Worldbank)

Japan 182,8 %
Italy 103,2 %
USA 65,6 %

Eurozone 65,2 %
France 64,4 %
Germany 63,1 %
European Union 58,9 %
UK 45,6 %
Swiss 43,7 %
Netherlands 42,4 %
Sweden 35,5 %

Posted by Amalia Schrute | Report as abusive

Amalia Schrute, I am glad you bring that angle in and we should link it to Rolfe’s article graphic above:

http://blogs.reuters.com/rolfe-winkler/f iles/2009/09/public-and-private-debt-bur den.jpg

In that instance I commented on the ‘band’ within which government and business debt moved/should move. Having thought about it more, I got worried what this ‘debt’ word actually means and commented on it in one of Agnus Crane’s blogs: to compare it to GDP, it needs to be some form of movement in money supply. I am just weary that we are dividing a position (debt) by a time result (GDP) which would be like dividing the balance sheet by the income statement. Anyway, as long as we make the same logic mistake consistently, let’s move on: in essence, looking at you figures, there is a disparity or inconsistency.

Taking all into account, my gut feel remains that government debt and business debt should move in tandem at <50% each, else you land in a combined debt trap/credit crisis over 100%, and by the same token, GDP should be financed at +-50% cash and +-50% credit. Illiquidity is one thing, insolvency another. Then of course, the capital accounts remain as a debate, i.e. asset values versus capital and reserves.

I don’t understand what you mean with: ‘These currencies are already where the US dollar is supposed to be headed ten years from now.’ A (descending) World Bank table of the G20 countries would be interesting. I think that some economies cried wolf, they were/are actually better off than portrayed. Some did not even have a breath to cry wolf.

Posted by Gaspard | Report as abusive

The demise of the dollar has been gradual. It has been on a downward slope since the early 1970′s. We are now witnessing the final descent and this will be rapid. Watch for the proposed “One World Currency” to begin circulation around 2012.

Posted by Anthony Hernandez | Report as abusive

Reading an article about the dollar in “the Independent” is a bit like reading an opinion piece about Jewish culture in Der Angriff circa 1942.

Posted by evilhippo | Report as abusive

All the other countries are printing money too at break neck speed to keep up with Americas money printing. These guys are clueless. All the fiat currencies in the world will go down together. Fiat currencies were created by criminals. They should all be pulled out of their concrete buildings and lined up along their walls and used for target practice. Millions have suffered and died due to these counterfeiters. Unless this is stopped millions more will suffer and die.

Posted by gotham1883 | Report as abusive