Greenback is not just America's currency. It's the world's!

Why the Dollar's Reign Is Near an End

Excerpts:

Consider this: When a South Korean wine wholesaler wants to import Chilean cabernet, the Korean importer buys U.S. dollars, not pesos, with which to pay the Chilean exporter. Indeed, the dollar is virtually the exclusive vehicle for foreign-exchange transactions between Chile and Korea, despite the fact that less than 20% of the merchandise trade of both countries is with the U.S.

Chile and Korea are hardly an anomaly: Fully 85% of foreign-exchange transactions world-wide are trades of other currencies for dollars. What's more, what is true of foreign-exchange transactions is true of other international business. The Organization of Petroleum Exporting Countries sets the price of oil in dollars. The dollar is the currency of denomination of half of all international debt securities. More than 60% of the foreign reserves of central banks and governments are in dollars.

The greenback, in other words, is not just America's currency. It's the world's.

...

The dollar is about to have real rivals in the international sphere for the first time in 50 years. There will soon be two viable alternatives, in the form of the euro and China's yuan.

...

Foreign investors—private and official alike—hold dollars not simply because they are liquid but because they are secure. The U.S. government has a history of honoring its obligations, and it has always had the fiscal capacity to do so.

But now, mainly as a result of the financial crisis, federal debt is approaching 75% of U.S. gross domestic product. Trillion-dollar deficits stretch as far as the eye can see. And as the burden of debt service grows heavier, questions will be asked about whether the U.S. intends to maintain the value of its debts or might resort to inflating them away. Foreign investors will be reluctant to put all their eggs in the dollar basket. At a minimum, the dollar will have to share its safe-haven status with other currencies.

Comment: A very good article on currency exchange. (Which I find to be a complicated subject).

Before 1914, there were three international currencies: the British pound, the French franc, and the German mark.

The Search for a New Currency System

Excerpt:

Markets aren't confident that the euro will exist in a decade's time, markets for Japanese yen aren't nearly large enough or liquid enough, and the Chinese are hesitant to assume the hassles that accompany the use of a country's currency as a store of value and medium of exchange around the world.

Barry Eichengreen, an economic historian at the University of California at Berkeley, argues that the world may end up with more than one full-fledged international currency. The old logic—that importers and exporters want a common unit of account and that both official and private investors will rely on the currency with the most liquid markets—is outdated, he says.

The notion that importers, exporters and bond traders all need to use the same currency "holds less weight in a world where everyone has a mobile phone that can compare currency values in real time," he says. The global economy is now so big "there is now room for deep and liquid markets in more than one currency."

Comment: Interesting article on the present state of currency exchange. It's a complex topic but basically countries that import more than they export (the US) and borrow heavily (again the US) risk currency devaluation. Currency devaluation makes our goods and services relatively less expensive and foreign goods and services more expensive. Perhaps you have traveled to a foreign country and found (as in my case going to Mexico in the late '60s) things there unbelievably inexpensive. Or have traveled to Europe only to find that a Coke costs $ 5.

"Think of it like the solar system: It started with gold at the center, as the sun, but then Jupiter got bigger and bigger until all the planets started circulating Jupiter instead."

Comment: a good read on the currency crisis. My head spins trying to understand it all but this is helpful.

Currency Chaos: Where Do We Go From Here?

Excerpts:

"The problem started before World War I," Mr. Mundell commences. "The gold standard was working fairly well. But it broke down because of the war and what happened in the 1920s. And then the U.S. started to become so dominant in the world, with the dollar becoming the central currency after the 1930s, the whole world economy shifted.

"Think of it like the solar system: It started with gold at the center, as the sun, but then Jupiter got bigger and bigger until all the planets started circulating Jupiter instead."

"And the U.S. is Jupiter?" I deduce.

"Yes," he affirms, "and the spread of the dollar was just miraculous as it became the anchor for the Bretton Woods fixed exchange rate system after World War II. The price of gold was fixed at $35 an ounce in 1934, but by the time the U.S. got through the Korean War, the Vietnam war, with all the associated secular inflation, the price level had gone up nearly three times.

"Gold became very undervalued; European countries traded in dollars for gold until the U.S. lost more than half its stock. The U.S. went off gold in 1971, under Nixon, and nobody else has gone on it again."

...

"So our problems today," I posit, "are related to the fact that the Bretton Woods system of fixed exchange-rates linked to gold broke down?"

"The system broke down," he hastens to explain, "not because of fixed rates. Fixed exchange rates operate between California and New York . . . the system broke down because there was no mechanism to keep the world price level in line with the price of gold."

...

"The U.S. berates China for its exchange rate policy, which Washington doesn't like," Mr. Mundell says, noting that discriminatory tariffs against China might not be legal under the treaty provisions of the World Trade Organization. "But one-sided pressure on China to change its exchange rate is misplaced."

Shaking his head, Mr. Mundell asserts: "The issue should not be treated as a bilateral dispute between the U.S. and China. It's a multilateral issue because the U.S. deficit itself is a multilateral issue that is connected with the international role of the dollar."

Comment: I added a several links that may be helpful. Note link to the Federal Budget deficit!

Loonie parity

Canadian dollar likely to trump US greenback: experts

Excerpt:

The Canadian dollar, or loonie as it is affectionately called here, is likely to soar above parity with the US greenback this year, experts at a Canadian bank said Wednesday.

Canadian Imperial Bank of Canada (CIBC) chief economist Avery Shenfeld said the Canadian dollar had already gained several cents in recent weeks as the market firms up expectations of an interest rate hike in July.

If as expected, the central bank "is out in front of the US Federal Reserve by a couple of quarters" in raising interest rates, the Canadian dollar could reach 1.02 dollars versus the US dollar by September, before dipping back to 0.97 dollars by year end," Shenfeld said.

The Bank of Canada has maintained its key lending rate at a historic low of 0.25 percent since April 2009 to help bolster a fragile economic recovery, but is widely expected to review its position mid-year.

CIBC said other factors were also aligning to push up the value of Canada's currency such as increased demand for oil, minerals and fertilizers; resurgent capital markets; and global debt fears.

"If the capital markets finally get an appetite for M&A (mergers and acquisitions) then Canada could be one of the first places to see the benefit of foreign inflows," said CIBC analyst Zafar Bhatti.

Or "if the investing world starts looking for a place to park capital in the wake of deteriorating sovereign credits then Canada would look very attractive," Bhatti said in a report.

Since the beginning of the year, the Canadian dollar has appreciated 2.5 percent against the US dollar and more than seven percent against the euro.

The loonie last achieved parity with the US greenback in 2008, and previously hit a record 1.10 dollars in 2007.

Comment: On a trip from Thunder Bay to Fort Francis, we stopped at some small Canadian town for coffee and a scone. I paid with a US $ 20. The change Canadian was more than $ 20. It was confusing. Back in the days when the dollar meant something

North Korea: "shock therapy" on currency

N. Korea Revalues Currency to Curb Free Trade

Excerpts:

The currency reform, the North’s first in 17 years, was implemented on Monday without warning, South Korean news media reported on Tuesday, citing North Korean foreign trading officials based in China and anonymous sources inside the isolated country.

North Koreans were required to swap their old bills for new notes at an exchange rate of 100 to 1 by next Sunday, according to Good Neighbors, a Seoul-based civic group that monitors North Korea through informants inside the country. The authorities also put a cap on the swap, allowing individuals to turn in a maximum of 100,000 won in old notes.

“As people rushed to swap money, commercial activities have virtually come a standstill,” Good Neighbors said in a statement. “The purpose of the reform is to kill private market activities that stoked anti-socialism.”

...

“The primary aim is to control inflation,” said Choi Soo-young, an expert on the North Korean economy at the government-funded Korea Institute for National Unification in Seoul. “But the North also wants to stop the market from prospering too fast.”

Since a famine killed many North Koreans and shook the country’s ration system in the mid-1990s, its centrally planned economy, symbolized by state-run stores that sell goods at government-set prices, has coexisted with an unofficial economy where people sold home-grown food or goods smuggled from China.

“With the government stores unable to provide enough supplies, unofficial markets have fueled inflation,” said Dong Yong-sueng, an economist at the private Samsung Economic Research Institute, who monitors the North Korean economy.

Food prices has risen so sharply in recent years that ordinary workers can buy only two kilograms of rice with their monthly wages, according to Open Radio For North Korea, a Seoul-based radio station and Web site which specializes in collecting news from informants within the North.

The North Korean regime also saw the increasingly vibrant markets as a conduit of capitalist ideas and outside influence on its tightly controlled populace.

The ruling elite reportedly cracked down on the North’s biggest wholesale market, located in Pyongsong on the outskirts of Pyongyang, the capital, earlier this year, dispersing many traders into smaller markets in nearby districts.

The currency reform will wipe out much of the wealth that traders have accumulated, thus dampening the market activities, Mr. Dong said. For the regime, it has an added political benefit of fighting a gap between the rich and the poor among ordinary citizens, Mr. Choi said.

By knocking off two zeros from its banknotes, the measure will have an immediate but short-lived impact in fighting inflation, Mr. Choi and Mr. Dong said. It also could aggravate the North’s already acute shortages by discouraging the markets, which have emerged as an important source of food for North Koreans.

Comment: Mix totalitarianism and fiat currency and this is what you have!

European missions: 35% loss of buying power

Weak dollar undercuts missionaries, relief workers

Excerpt:

For missionaries and faith-based relief groups, the weak dollar has been a major headache. It's caused them to cut back on budgets and cancel projects around the world. And it's made the small things of daily life, like buying groceries or gas, more difficult.
...
The main challenge is the strength of the euro. In 2002, the dollar and the euro were equal. It takes $1.47 to match a euro — a loss of more than 35% in buying power. The cost of everything from saltine crackers to the monthly heating bill has skyrocketed.

In response, missionaries have cut back wherever they can.

Susan Jett, a Southern Baptist missionary to Germany currently on furlough in Knoxville, says she quit buying necessities like clothes and even sending mail. "I don't mail anything back home," she said. "I wait for someone who is flying back and send it with them."

Jett said it's the cost of small things, such as day-to-day basics, like milk and bread, that add up. "I have to think twice before buying anything."

That means forgoing small familiar pleasures like going to McDonald's. Like many Americans living overseas, missionaries relish the chance to visit the golden arches.

"It smells like home," says Dennis Barton, a missionary who recently returned to the United States after more than 20 years in Europe. But even the bargain menu is now too pricey, Jett said. "For a family of four, it's more than 25 euros," Jett said. That's more than $36 in U.S. currency.

Comment: Something to pray about re missions!

European industrialists pained by the dollar’s decline

Europeans Toughen Line on the Dollar’s Weakness

Business / World Business
Europeans Toughen Line on the Dollar’s Weakness
By KATRIN BENNHOLD and STEPHEN CASTLE
Published: December 5, 2007
European policy makers hardened their tone this week on the decline of the dollar, as economists trimmed their growth forecasts for the 13-nation euro area.

Excerpt:

Louis Gallois, chief executive of the European Aeronautic Defense and Space Company, has become the most vocal among European industrialists who are feeling the pain of the dollar’s decline.

This week, Mr. Gallois said that over the next decade, the consortium’s Airbus subsidiary would be obliged to produce more of its planes outside Europe.

The plane maker, which sells its airplanes in dollars but incurs about 50 percent of its costs in euros, loses 1 billion euros, or $1.48 billion, in profit every time the euro gains 10 cents against the dollar. This places the company at a competitive disadvantage against its American rival, Boeing, whose costs are almost entirely dollar-denominated.

Latécoère, a major French subcontractor for Airbus, has already begun moving some low-value-added work to Morocco, Tunisia and Brazil.

Comment: Compare earlier Airbus post!

The weak dollar - stockmarket connection

Sinking dollar, rising portfolio

The dollar has had declines of 25 percent or more twice in the recent past; the current fall is 36 percent since 2002 against a basket of foreign currencies. In the early 1970s, the peculiar combination of rising inflation and low demand known as stagflation was weighing the buck down. In the mid-'80s, the dollar fell amid fears the U.S. was about to be overtaken by Japan Inc. as the world's economic superpower.

This time around, the reasons for the decline are more subtle. The U.S. economy has been expanding, but that growth has not been spread evenly; now the meltdown in the housing market poses a recession threat.

Moreover, we're running a large federal deficit and a trade gap of nearly $60 billion a month. All of that puts downward pressure on the dollar.

So far that pressure has been beneficial: It's made U.S. goods sold overseas more affordable, helping to cut the trade deficit. And it is boosting the bottom lines of U.S. exporters because their foreign sales are in currencies that are appreciating.

"This is a healthy, corrective development for our economy," says Eaton Vance chief economist Robert MacIntosh. Certainly the stock market seems comfortable with the trend. The S&P 500 has risen 35 percent in the five-plus years that the dollar has been on the decline.

Comment: Nice graphic associated with the article.

Sarkozy, euro vs $, Airbus Costs

Sarkozy Says Dollar Drop Risks Triggering Trade War

Excerpt:

Sarkozy said yesterday that Toulouse, France-based Airbus SAS, the world's biggest planemaker, loses about 1 billion euros ($1.5 billion) for every 10-cent increase against the dollar.


``Those who admire the nation that has built the world's greatest economy and has never ceased trying to persuade the world of the advantages of free trade expect her to be the first to promote fair exchange rates,'' Sarkozy said. He repeated his concern that the Chinese yuan is unfairly undervalued.


Comment: Follow on to early CFG post: "... the drop in the dollar makes the cost of United State goods and services less expensive to consumers in other countries and the cost of other countries' goods and services more expensive to us in the United States. Thus exports should be increasing in coming days and imports decreasing." Sarkozy's concern is that Airbus sales to US carriers will tank!