"Many people with a sense of history remain mystified at the dollar's loss of eminence in world currency markets, and especially by its mauling at the hands of an upstart currency like the euro. The main reason, as economics professors point out, is that Americans have become binge spenders, drunk on remarkably low interest rates that have made mortgages cheap and credit card debt irresistible. To finance all this, Uncle Sam himself has become a profligate borrower. Result: more dollars leave America than enter it."
***Although all this has been axiomatic for years, lately the greenback has lost that all-important asset - the world's confidence. "Foreign investors are increasingly trying to diversify out of dollar assets into other currencies," points out one economist.
But how low can the dollar go? Its present valuation represents a loss of 11.5% against the euro this year, from what was already a low starting point. Since anybody predicting those cross-rates even one short year ago would have been laughed out of the City, dollar-watchers are understandably nervous of sticking their necks out.
Perplexity reigns. "This is the first time in my career that I am really worried about the dollar," the head of currency research at Morgan Stanley told the Financial Times last week. "The dollar is in trouble."
That is the view of just one currency expert, but Europe's central banker par excellence, Jean-Claude Trichet of the European Central Bank, is another who cannot call a halt to the dollar's decline. Indeed, he seems to believe that it has taken a turn for the worse and, in bankerly language, shifted from a "benign" descent to a "disorderly" one. In short, currency traders are selling the dollar down in bigger volumes than ever.
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Ironically, it will probably be the British and Europeans who will turn the greenback around by buying American. Already cheap, US-made goods become cheaper with every basis point the dollar declines, while British, European and Japanese-produced goods become more expensive. Although manufacturers on this side of the Atlantic can counter the effect of their goods costing more in America by cutting costs and other measures, there is a limit. The 33% increase in the euro, which has borne the brunt of the dollar's fall, has already robbed them of room to manoeuvre.
For the first time in memory, the Canadian dollar is worth more than the United States Dollar. Good for exports except what if the Chinese decide to dump all their dollars? Welcome to the nightmare....
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