Tag Archives: U.S. dollar

The Declining Dollar and the Rise of American Jobs

Blogging over at The Daily Beast, Simon Johnson offers an interesting take on the recent but steady decline in the value of the U.S. dollar. Gold prices reached record levels yesterday, as the U.S. dollar continued its six month decline against most major international currencies. The dollar is currently trading at near-record lows against the euro and the yen. And according to a story by Robert Fisk in Tuesday’s Independent,

Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

This comes on the heels of discussions within the Chinese government to diversify its currency reserves, potentially replacing the dollar as the global reserve currency with a basket of currencies.

If true, such moves could have dramatic implications for the U.S. economy. The dollar has been the de facto reserve currency for the world since the end of World War II. And oil is the most widely traded commodity in the world, and the global oil trade provides a significant level of demand for U.S. dollars.

Most economists suggest that a shift will occur, but that it will be a gradual change rather than a sudden shift. Indeed, as former U.S. Trade Representative and current President of the World Bank, Robert Zoellick conceded ahead of World Bank meetings in Istanbul last week, “One of the legacies of this crisis may be a recognition of changed economic power relations.”

Still, Simon Johnson suggests that the current decline in the value of the dollar may not be anything to worry about. Indeed, he suggests that it may be part of a deliberate strategy by the Obama administration to improve the economic outlook in the United States ahead of 2010 Congressional elections. A weak dollar has historically been viewed as good for manufacturing but bad for the financial sector. Given that inflation is a major concern currently, the reason for a strong dollar appear less compelling. Johnson writes,

think what a weaker dollar does for the industrial heartland, where so many congressional seats will be in play and where today it’s easier to export or compete against imports because the same dollar costs convert into fewer euros, yen, or renminbi (this is what a “weaker” dollar means—foreigners can more easily afford our goods and their stuff is more expensive to us). If the dollar stays weak or declines further, our car companies, machinery makers, and turbine blade manufacturers will soon be rehiring and we’ll finally get some job growth as part of our sputtering economic recovery.

Certainly a new spin on an old debate.

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Five Stories You Might Have Missed

It’s been a relatively quiet week in domestic U.S. politics. Congress continues to spar over the Pelosi-CIA briefing debate, and observers continue to speculate about who President Barack Obama might nominate to replace Justice David Souter in the U.S. Supreme Court. Congress also moved forward with passage of a cap-and-trade system to address greenhouse gas emissions (though the legislation still has a long way to go before it becomes law). The most interesting story of the week came on Wednesday, when former Vice President Dick Cheney and President Obama gave “dueling speeches” on the topic of torture and U.S. national security.

But while it was relatively quiet in the United States, it was a busy week globally. Here are five stories you might have missed:

1. The campaign for elections to the European Parliament, scheduled for June 4, are beginning to heat up. The European Parliament is selected on the basis of nation-wide proportional representation elections, which means that national politics often play out in interesting ways at the European-wide level. Thus, observers are looking to the results of the election in the U.K. as a forecast for Gordon Brown’s political future, which has been challenged in recent weeks by the ongoing corruption scandal. In Italy, the vote is being cast as a referendum on Silvio Berlusconi’s aggressive anti-immigration platform. And in France, the campaign is centering on the question of Turkish membership in the European Union.

2. The German presidential elections took place on Saturday, with incumbent president Horst Köhler narrowly winning re-election and handing Chancellor Angela Merkel a symbolic victory ahead of her own re-election campaign. The German presidency is elected by the upper house of the country’s parliament. The position has little real authority, with executive power being vested in the office of the chancellor. However, a challenge from Merkel’s coalition partners threatened to see Köhler defeated, creating a political challenge just four months from the country’s next general election.

3. A trade agreement currently being negotiated between China and Brazil aims to see the countries use their own currencies rather than U.S. dollars in transactions. The move, seen as part of China’s broader strategy of moving the U.S. dollar out of its status as the global reserve currency, expands on a previous currency swap agreement between the two countries. In separate negotiations, China agreed to expand imports of Brazilian chicken and beef and to provide up to U.S. $10 billion to Brazil’s government-controlled oil company in exchange for guaranteed oil supplies over the next decade. China overtook the United States as Brazil’s largest trading partner earlier this year. 

4. The government of Nigeria launched a new military offensive in the Niger River Delta last week, hoping to defeat armed opposition forces in the area. The move marks a decisive shift in the politics of the delta. The previous Nigerian administration had opted for a more diplomatic approach, emphasizing negotiations with the Movement for the Emancipation of the Niger Delta, an umbrella group emphasizing autonomy for the Warri region. According to observers, however, the new Nigerian government headed by Umaru Yar’Adua is opting for a military-based approach to the crisis. The oil-rich region houses operations by leading international oil companies, including Royal Dutch Shell, ExxonMobil, and Total. The conflict has led to a sharp decline in Nigerian oil exports, and observers fear that this may lead to a spike in global oil prices.

5. Former South Korean President Roh Moo-hyun committed suicide on Saturday. Roh rose to power as a human rights lawyer representing student and union activist in the struggle against the country’s military government in the 1980s. He was elected president in 2003 on a strong anti-corruption and political reform platform, earning him the nickname “Mr. Clean.” However, after his party suffered a series of electoral defeats, he resigned from office in 2008. Shortly after Roh’s resignation, accusations of corruption in his administration began to surface, including charges that a South Korean tycoon paid his wife $1 million while another family member received $5 million from the same tycoon. Roh killed himself after losing face as a result of the scandal. However, such accusations have not been uncommon in South Korean presidential politics, and two of the four presidents who preceded Roh have been jailed on similar charges. Nevertheless, observers fear that Roh’s suicide may increase political tensions in South Korea.

The Decline of the U.S. Dollar

On his blog for Foreign Policy, Daniel Drezner highlights a recent paper authored by the governor of the central bank of China calling for the development of a new global reserve currency to be administered by the International Monetary Fund. Surprisingly, this story was buried in the Financial Times.  But Drezner rightly points out that a move away from the U.S. dollar as the global reserve currency would have dramatic implications.

Reserve currencies refer to the money held by governments and international institutions as part of their foreign exchange reserves. Reserves serve as the lubricant of international financial transactions and permit countries to barrow money and finance purchases. Since the shift away from species-backed currencies (the U.S. dollar was taken off the gold standard in 1971), the value of currencies has been determined by market forces. Though governments may attempt to manage currency values by buying or selling their own currencies, such efforts are often dramatically unsuccessful— witness the Russian Ruble collapse in 1998, the Asian Financial Crisis in 1997, and so on.

Since the end of World War II, the U.S. dollar has been the global reserve currency. Even today, almost two-thirds of all currency reserves globally are held in U.S. dollars.  The Euro, the second-most widely held currency, accounts for about one-quarter of all reserves, and other currencies, including the Pound sterling, the Japanese yen, and the Swiss franc, round out the remainder.

Because the U.S. dollar has been the global reserve currency, the United States enjoys a number of benefits. Most important of these is the fact that the United States can finance higher trade and budgetary deficits, as it has increasingly done in recent years. A shift away from the U.S. dollar as the global reserve currency would increase the cost of borrowing for the United States and make financing the national debt, which has recently crossed the $10 trillion mark, much more difficult and expensive.

Drezner points out that the shift proposed by China is not likely to happen quickly. Indeed, as the single-largest holder of U.S. dollars, China would be ill-served by a sharp and sudden decline in the value of the dollar. Nevertheless, the issue is likely to occupy decision makers at the upcoming G20 summit. More importantly, it potentially represents the most dramatic shift in the global political economy in decades.

Five Stories You Might Have Missed

The G20 (which actually has 22 states attending this year) met this weekend in London. The ongoing economic crisis, of course, dominated discussions. The meeting produced a communiqué in which the states commit themselves to restoring financial growth and strengthening the global financial system. Discussions were dominated by several important divisions between the member states, particularly between the developed and developing countries (largely over reform of the International Monetary Fund) and between the United States and Europe (over the urgency and scope of economic stimulus efforts). In the end, the only real, concrete policy initiative was the agreement to enlarge the membership of the Financial Stability Forum to include all G20 members. Created in the aftermath of the 1997 Asian Financial Crisis, the FSF monitors the global financial system and coordinates policies between the international financial institutions.

In news from outside the G20 meeting:

1. On Friday, Chinese Premier Wen Jiabao expressed concern over the mounting U.S. deficit and the future stability of the U.S. economy. The Chinese government currently holds an estimated 70 percent of its $2 trillion foreign exchange reserve in dollar-denominated assets and is the single-largest buyer of U.S. Treasury Bills. A decline in the value of the U.S. dollar therefore threatens China’s massive reserves. But while the Premier is pressuring the U.S. to ensure the stability of its currency, Luo Ping, the director general of the Chinese Banking Regulatory Commission, reassured the U.S. government (and dollar markets more generally), that the investment in the dollar remains the “only option” for Chinese foreign reserve holdings.

2. Secretary of State Hillary Clinton, fresh off her trip to the Middle East and Europe, will be visiting Mexico later this month to discuss the crisis resulting from the growth of drug cartels in the country. The U.S. and Mexico already have an ongoing anti-drug effort (currently valued at approximately $750 million). However, the effort has not been successful in curbing the growing influence of the cartels, and many observers fear that Mexico may fall to the cartels. The situation in Mexico has become so stark in recent weeks that the U.S. State Department has issued a travel advisory, and the U.S. Joint Forces Command has begun gaming exercises based on the assumption that Mexico could undergo a “rapid and sudden collapse.”

3. The deepening political crisis in Pakistan continues. Over the last week, the government has increased its crackdown on opposition party members, which they accuse of attempting to undermine Pakistan’s fragile parliamentary democracy. A series of nationwide protests led by many of the country’s lawyers has been demanding the “restoration of democracy and the rule of law.” On Sunday, the government placed Nawaz Sharif, leader of the Pakistan Muslim League-Nawaz, under house arrest and attempted to block protests in Islamabad, the country’s capital.

4. On Tuesday, Madagascar’s the army gave the country’s president, Marc Ravalomanana, a 72-hour ultimatum to resolve the ongoing crisis or resign from office. Madagascar has been suffering from an economic malaise due the collapse of the vanilla market, Madagascar’s main export. While the country has begun to attract foreign investment, Madagascar remains incredibly poor, with a GDP per capita of just $330, and inequality between rich and poor remains very high. Ravalomanana remains defiant. On Saturday, he addressed his supporters to say he would not be resigning.

5. In a new statement released on Saturday, Al Qaeda leader Osama bin Laden warned Arab leaders against cooperating with the West and renewed calls for his followers to prepare for jihad. Bin Laden singled out Egypt, Jordan, and Saudi Arabia, as countries headed by leaders that “have plotted with the Zionist-crusader coalition against our (Muslim) people.” Bin Laden also made reference to the recent conflict between Hamas and Israel in Gaza, describing it as a “holocaust.”