“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)

35 comments

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Is the following asking or telling ? ‘a basket of dollars, euros, sterling and yen, as a super-sovereign reserve currency.’ Don’t leave Africa, the Mid East, Russia, India, China, Oceania, South America and Canada out this time around, we don’t want to reinvent the same old problem for the next decade and have the Sun set on our half-baked plans again.

Posted by ANON | Report as abusive

*The Demise of the Dollar* (Independent/UK) by Robert Fiske is not a joke. It’s a fact. And with escalating fiscal deficit and IOU’s from CBC (PRC) – wait until you realize what adoption of healthcare legislation cost the Treasury – the value of dollar will inevitably recede as FX markets are already demonstrating with gold prices over $1K and rising after publication of Fiske’s article.

The Decline and Fall of the Roman Empire was not an incident but a real historical clamity for continental Europe….American capitalism has surely outlived its best days…and its decline and fall is happening right now.

Posted by hari | Report as abusive

Dollar is obviously sliding. In fact American influence in world politics is also sliding. Amartya Sen has rightly said that Obama is a lawyer , not an economist. That explains the reason.

I would not characterize the current situation as “a light breeze that is blowing against the dollar”. It is more a hard Atlantic blow come from the north.

And for historical context, I would also look at the collapse of Ottoman finances in the 19th century, plus a much more recent example: the awesomely rapid unravelling of the USSR.

History is, if anything, accelerating..

Posted by Costas Haramis | Report as abusive

What a bunch of bull……..the dollars demise is accelerating phenomenally. It is not going to be a slow decline but rather a very sudden one. When the 20 something TRILLION fiat dollars hit Main Street the devaluation is going to be unstoppable like the pre WWII Weimar republic. Hyperinflation is sure to come!

By the way, Mark Twain made that quote before the Federal Reserve was conceived……he was obviously then not talking about the Federal Reserve dollar but rather the previous Second Central Bank of the United States dollar!!!!

Get your history right

Posted by sideefx | Report as abusive

My prediction is that following the recent example in Australia of an interest rate hike bringing confidence to their currency and economy (and possibly relief from suggestions of a potential run on the currency in some media reports) that other countries will follow suit… especially if there isn’t an election looming, unless of course there is little prospect (or desire) of the incumbent being returned to office when you may’s as well hike the rates anyway!
After all given the large increases in property and asset prices around the globe over the last decade or so, the mortgage and debt holders can afford it.

Posted by Peter H | Report as abusive

It is indeed Gotterdammerung for the USA and it’s worthless currency. Robert Fisk is right on, as usual.

Posted by Phil greene | Report as abusive

The decline of the Dollar and Pound will likely continue as demographic and societal factors have made both countries rely too heavily on public and private debt as well as having trade deficits. I would imagine the Pound will be dropped and the UK will adopt the Euro by 2020. As it stands the Pound has nearly drawn even with the Euro. If the United States continues to exist as an intact political entity it will at least try to implement some kind of Pan-American currency (Amero) within the next 20 years. There also exists the possibility that some kind of UN/IMF/World Bank sponsered fiat currency will arise as a global currency possibly based on the mentioned SDR’s. An excuse to implement this currency would probably come from some kind of tax or tariff to control global warming and the ease of a singular currency to enforce it.

The dollar’s demise will be sudden, but it will be political, not market factors.

Posted by Curt Umland | Report as abusive

[...] IMF Germany Germany appeared strained on October 6 09 on the possibility of increasing the role of the IMF funding in the financial system. Makes sense – the dollar seems not to sustain the stability that allows the currency to remain reserve and trade standard. [...]

best of my knowledge, America is destroyed by Gorge Bush and hatred who supported to establish the Cristian domain in Muslim countries. The trust America lost, it will never be regain. dollar has to go. My question to hatred American what they have gain by igniting hate?

[...] Free Europe took the Independents dollar-dumping story and ran with it, while Reuters offered the opposing view. While one writes that the conclusion that the series of alleged meetings “augurs an [...]

The only way to stop the demise of the dollar is to use a gold standard – which most politicians reject because it would mean smaller deficits and less government hand-outs. No currency will do well unless it has backing other than good-will.

Posted by Janice | Report as abusive

Dear Neal,

I don’t know what pair of glasses you wear when reading the article in “the independent” by Robert Fisk, it must have been fogged. Or you just need a pair of glasses when you didn’t wear them. Or you just can’t read. I don’t know.

I just say this:

A nation that needs to kill nearly threethousand of it’s (mostly) own citizens to try to hold on to its world dominance and tries to finance all this with easy credit and other bubbles, is doomed.

So is the dollar.

Posted by me | Report as abusive

The whole world is about being fair.
Civilizations will collapse, one by one, to the point that WE understand to be fair to each other and this goes for economics, politics, and humanity.

Posted by News | Report as abusive

What a bunch of bull……..the dollars demise is accelerating phenomenally. It is not going to be a slow decline but rather a very sudden one. When the 20 something TRILLION fiat dollars hit Main Street the devaluation is going to be unstoppable like the pre WWII Weimar republic. Hyperinflation is sure to come!

By the way, Mark Twain made that quote before the Federal Reserve was conceived……he was obviously then not talking about the Federal Reserve dollar but rather the previous Second Central Bank of the United States dollar!!!!

Get your history right
———————————————————

I disagree with your assessment. Please do not forget, currently US is still the largest consumer of products in the world. The dollar might be less important, but it certainly will not fade away. Currently US has a tax revenue of more than $2 Trillion dollars, having the national debt of $12 Trillion which is close to 100% of our GDP is still manageable(many European countries has more GDP/debt ratio), sure we need to cut spending all across the board in the future. But please be assured that our goods in technology, pharmaceuticals, commercial planes, military weapons, cigarettes, processed foods (largest producer in the world) are still being sold over the world in US dollars and will continue to be traded in US Dollars.

Maybe if China or the middle east will want to have another currencies for their goods, but we certainly do not want to trade our goods in foreign currencies. If the US dollars is to devalue against the China Yuan, which will happen eventually, it is probably not a bad thing as Yuan will be more expensive and so will Chinese Goods, making our goods cheap. We sure want the Chinese to take over as the largest consumer in the world as we will then sell more of our goods making the trade deficit between us and China less.

As long as the US will continue to create new products and sold to the rest of the world, we need not worry about US dollars being trash, as long as the world still need US goods and technology and many more of our goods, we need not worry that US dollars will not be used in the world.

Posted by cc | Report as abusive

In addition to my assessment. Another step needs to be made by American Citizens, that is to stop wasteful spending and save more of our income, that will stop the need to print more money or our economy based on borrowing. If one day American citizens will learn to have a saving rate of that of the Chinese @ 27%, we need not worry about the national debt nor the devalue of the dollar.

Posted by cc | Report as abusive

hindsight is always 20/20

Posted by scott | Report as abusive

This is good. Our money is worthless anyway. Maybe after the dollar looses it’s clout we’ll have the opportunity to start work in areas that further human development instead of chasing cash.

We don’t need money to do right. We don’t need money to better ourselves. We simply need the desire and the focus to do so.

Our money loosing it’s clout is a very good thing indeed.

Disagreeing does not make you right cc. When the $23.7 trillion becomes monetized and hits the streets, rampant inflation MUST take place….there is NO avoiding it. I suggest you read Economics 101 if you do not understand this simple issue.

Yes it is true that the US has been the largest economy in the past, however the slow down in manufacturing has yet to be fully comprehended. Remember the slow down last Christmas season? Well wait until you witness the slow down this year. With U6 at 16% conservatively we are going to be in for it!

Saving our income is good, (for the people) but the nations money supply relies on debt and so if the public starts to pay back their loans, the money supply will start shrinking. With the “Jobless recovery” and a “shrinking” money supply that equals stagflation, even worse than inflation.

Posted by sideefx | Report as abusive

kool…if the dollar declines as much as you’re all speculating, maybe the u.s. can get back to export manufacturing!

Posted by dr. arp | Report as abusive

If Obama stops the War then the dollar is perhaps salvageable. The rest of the World doesn’t want to pay for our Empire, which is entirely reasonable and understandable. We are the only ones not to outlaw piracy in 1853. If the neocons aren’t stopped, then will will indeed go bankrupt in short order, our bankers will cut us off.

Posted by Stan Lippmann | Report as abusive

I must join the chorus that says the demise of the US dollar will be swift.

The parallel of the British pound in the 20th Century is perhaps the most relevant.

Although Mr Kimberly says Britain fought two wars in the first half of the 20th century (they actually fought three major wars if you count the second Boer War) they still retained their primacy as the world’s reserve currency until after World War II.

Following the end of WW2 the demise was swift and final. By the mid 1950s it was essentially gone as the reserve currency, replaced by the US dollar.

The US government has been printing money like crazy to stimulate the economy. The only problem with this is that the more money there is, the less valuable it becomes.

When the US loses reserve status the loss will be compounded many times over.
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.

Posted by Xavier | Report as abusive

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

All fiat currencies are evil. It does not matter which country creates it.

Posted by gotham1883 | Report as abusive

I’m betting on a quick bust.

Posted by VeryGoodJeeves | Report as abusive

As the adolescents below vent their rage and hatred at the USA, I am indebted to one of them for pointing out that the article in the Independent you refer to here was written by Robert Fisk. Oh dear, there is not in all of England a more rabid left-wing USA hater than Fisk. Do you suppose that the highly educated Politicians of Finance might enter that into their calculations? Golly. What a thought. Oh, by the way, the Romans did not have a “dinar”, they had a “denarius”. Thought you might want to know.

Posted by michaelw_ny | Report as abusive