EconomicCrisis.US

The hand-wringing over the U.S. dollar’s fall has been overdone. The greenback is expected to remain weak, but few think declines will accelerate in spite of debates over the dollar’s role in the world economy.

This week the dollar fell to a 14-month low against a basket of six major currencies, in part because of concerns about the slow recovery in the U.S. economy.

But the decline in the currency has been orderly and other measures of risk, such as the rally in stocks and low interest rates, suggest a healthy outlook toward U.S. assets and economic growth.

The worries heightened earlier in the week when several Asian central banks intervened in the markets to buy dollars to weaken their currencies. Markets were calmed only later after U.S. Federal Reserve Chairman Ben Bernanke made comments that supported the greenback.
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When it comes to the economy and financial markets, good news has far outweighed bad news in 2009. Just about every piece of economic and financial market data is tracing out a V-shaped recovery. One would think that this would lead to a little more optimism from the conventional wisdom crowd, but it doesn’t. With unemployment at 9.8% last month and the economy still losing jobs at an elevated pace, people are worried. Many fear a W-shaped economy, otherwise known as a double-dip recession.

These fears are overblown. The only double-dip recession of recent decades happened in the early 1980s, when the country was in the grip of “stagflation” and the Federal Reserve ran a roller-coaster monetary policy. The federal funds rate more than doubled—to 17% from 7%—between 1978 and 1980, putting the brakes on inflation but causing the first recession. The Fed then cut the funds rate to 9% in 1980, causing a 12-month recovery, and raised it back above 19% in 1981, causing the double dip. No one in their right mind expects Ben Bernanke’s Fed to hike then slash rates anywhere near those extremes.
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Last autumn’s global financial crisis set off an economic earthquake. And we are still feeling the tremors. The latest sign of the ground shifting beneath our feet is our report today of plans by Gulf states, China, Russia, France and Japan to end their practice of conducting oil deals in US dollars, switching instead to a diverse basket of currencies.

It is not hard to see the motivation for oil exporters to move away from the dollar. The value of the US currency has fallen sharply since last year’s meltdown. And fears are growing, in the light of a spiralling US government deficit, that a further depreciation is likely. They do not want to sell their wares in return for a currency with an uncertain future.
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The president of the World Bank cautioned U.S. authorities on Monday against assuming the dollar would maintain its role as the world’s reserve currency.

Robert Zoellick said other currencies such as the euro and the Chinese yuan could win increasing acceptance in international currency markets.

He said the United States “would be mistaken to take for granted the dollar’s place as the world’s predominant currency. Looking forward there will increasingly be other options to the dollar.”

China, Russia and India have indicated they want to see long-term changes in the international monetary system in the wake of the financial crisis that has pushed the world economy into its first synchronized downturn since World War II.
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