The passing of the buck?(The Economist )

[RedEarth]

The passing of the buck?

Dec 2nd 2004


America's policies are putting at risk the dollar's role as the world's dominant international currency


FORECASTING exchange rates is an inexact business. As Alan Greenspan, the chairman of America's Federal Reserve, once said, the activity “has a success rate no better than that of forecasting the outcome of a coin toss.” Recent years have borne this out: most currency forecasters would actually have done better if they had simply tossed a coin—at least they would have been half right. Yet over the next few years it seems an excellent bet that there will be a large drop in the dollar.

Since mid-October the dollar has fallen by around 7% against the other main currencies, hitting a new all-time low against the euro and a five-year low against the yen. The dollar has lost a total of 35% against the euro since early 2002; but it has fallen by a more modest 17% against a broad basket of currencies, including the Chinese yuan, which is pegged to the greenback. The dollar wobbled badly this week, having fallen for five successive days after Mr Greenspan said that America's current-account deficit was unsustainable because foreigners would eventually lose their appetite for more dollar-denominated assets.

Mr Greenspan may not be the only central banker to have become bearish on the dollar. Markets have been rattled by concerns that foreign central banks might reduce their holdings of American Treasury bonds. Last week, officials at the central banks of both Russia and Indonesia said that their banks were considering reducing the share of dollars in their reserves. Even more alarming were reports that China's central bank, the second-biggest holder (after Japan) of foreign-exchange reserves, may have trimmed its purchases of American Treasury bonds.

This combination of events has led some economists to ponder the once unthinkable: might the dollar lose its reserve-currency status? Over the past 2,000 years, the leading international currency has changed many times, from the Roman denarius via the Byzantine solidus to the Dutch guilder and then to sterling. The dollar has been the dominant reserve currency for more than 60 years, delivering big economic benefits for America, which can pay for imports and borrow in domestic currency and at low interest costs.

The dollar's share of global foreign-exchange reserves has already fallen from 80% in the mid-1970s to around 65% today. And yet does the dollar really risk losing its status as the world's main currency? The same question was asked in the early 1990s after the dollar's previous long slide, but the dollar's pre-eminence survived. Then, however, there was no alternative to the dollar. Today the euro exists, and could yet emerge as a rival to the greenback.

http://economist.com/opinion/PrinterFriendly.cfm?Story_ID=3445928

[girl gone mad]

1. Good article.

In my opinion, all that remains to be seen is how quickly the collapse of the dollar and switch to the Euro as reserve take place.

[PROGRESSIVE1]

2. Good Article