Does America Want a Weak Dollar?
Michel Morkos Al-Hayat - 05/05/08//
For about a year, the US dollar has been dropping. None of the Federal Reserve's measures has worked to stop the slide, whether pumping billions of dollars to meet financial institutions' need for liquidity, after the subprime mortgage crisis sucked it out of the system, or reducing benchmark interest rates from 4% to 2%, in a short period of time. The dollar has been making one record plunge after another and shedding value left uncompensated by President George Bush's stimulus plan to bolster his country's economy and give tax cuts to consumers. In fact, the dollar dropped to about half its level of October 25, 2000 against the Euro, when the later was worth $0.823. Although Secretary of Treasury Henry Paulson has always called for a "strong dollar," his administration has yet to begin taking measures that will stop the greenback's fall.
Amid this growing weakness of the world's key currency, it appears that the world will not give up dealing with the dollar, no matter how weak it gets. The US administration is well aware of this and of the consequences, doing all that it can to maintain the situation, despite its rhetoric of boosting the dollar. Crude oil, raw materials, agricultural products, and even Indonesian palm oil, which is exported to produce ethanol, will continue to be priced in dollars, as long as the leading countries that are concerned with the global economy fail to find an alternative currency that dethrones the bloated currency king (the dollar). Thus, two-thirds of the world foreign currency reserves, 80% of exports from countries like Indonesia and Pakistan, and 86% of $3,200 billion worth of daily transactions will continue to be denominated in dollars (according to the weekly Challenges).
This situation will help the US maintain its dominance and guide the dollar in the fashion that pleases it to make up for its record-high trade deficit, negative saving by American households, and the costs of the war in Iraq, which are estimated at around $5,000 a second, or $3 billion dollars a week. The dollar will remain "America's currency," as well as "the world's problem," according to the assessment of Richard Nixon's Secretary of Treasury, John Connally. The rates on a weak dollar - the biggest professional secret of the US administration - will be insufficient to generate confidence.
It is true that US exports to Europe rose 16% on an annual basis. However, were it not for the weak dollar, the corporate first-quarter declared profits would not have reached this unexpected level and would not have risen between 20-25% in fixed prices compared to a year ago. The Federal Reserve will not support the dollar's price. It threatens the dollar's immunity whenever it reduces interest rates, in an attempt to stop the economic recession in the country. Merrill Lynch believes that the dollar has seen periods of strength and rises, as in the economic crises of 1990 and 2001-2004, when the world's investors sought quality investments. The US economy was the superficial center of the crisis. However, just because raw materials are denominated in dollars, things are moving toward a vicious circle. Exporters of oil, raw materials, and precious metals are raising the prices of their products to compensate for what they have lost owing to the drop in the dollar. Americans are absorbing 100% of this shock. They are receiving raw materials in a currency that has lost its value. American drivers have spent $100 billion on gas in the first quarter of this year, compared to $40 billion during the same period of 2002. It is true that the weakening dollar boosts exports, but this does not stop the chronic slide of the currency, away from its real value.
The trade deficit in the US has doubled during Bush's two terms, exceeding $700 billion in the last three years, or 5% of GDP. If it is added to the budget deficit and the drop in savings by households, we can observe how sick the US economy is. However, analysts are divided: one group sees the end of the dollar era, while the other assumes that a slight increase in the interest rates early summer is sufficient to help the economy leave the "intensive care" room.
The magazine Challenges quoted a currency expert from Morgan Stanley, Stephen Jen, who has observed the "gradual but determined" trend toward the global diversification of US capitals. Since 2003, mutual funds have increased their share of foreign investments from 15% to 22.5%. If other investment funds follow suit, the size of investments abroad will stand at $1,160 billion. As he said, "The biggest threat to the greenback is not from Chinese industrialists, or oil producers and exporters, or from speculators, but from the American savers themselves."
Is the US trying to see a weak dollar? The US is benefiting from its currency, which has become "attractive" to investment and a help for exports, financing the country's war in Iraq and elsewhere!
But what about the countries whose national currencies are pegged to the dollar?
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