Dol­lar strength re­flects global re­al­ity

Lesotho Times - - Business -

NEW YORK — Ever since the Wall Street fi­nan­cial cri­sis of 2008, pre­dic­tions of the dol­lar’s demise have come fast and fu­ri­ous. As the US econ­omy sank into re­ces­sion, so too did con­fi­dence that the green­back could main­tain its longheld po­si­tion as the world’s No.1 cur­rency. In Beijing, Moscow and else­where, pol­i­cy­mak­ers railed against the dol­lar-dom­i­nated global fi­nan­cial sys­tem as detri­men­tal to world eco­nomic sta­bil­ity and vowed to find a re­place­ment. Cen­tral bankers in the emerg­ing world com­plained that the pri­macy of the dol­lar al­lowed Amer­i­can eco­nomic pol­icy to send shock waves through the global econ­omy that roil their own mar­kets and cur­ren­cies.

But here we are, six years after the cri­sis, and the dol­lar is show­ing just how re­silient it ac­tu­ally is. The dol­lar in­dex, which mea­sures the green­back’s value vs. a bas­ket of other cur­ren­cies, has reached a four-year high. Those pol­i­cy­mak­ers who bit­terly crit­i­cize the dol­lar show lit­tle ac­tual in­ter­est in dump­ing it. The amount of US Trea­sury se­cu­ri­ties held by China stands at a whop­ping $1.27 tril­lion (M13.8 tril­lion).

The new­found strength of the dol­lar makes per­fect sense. Sure, the world eco­nomic land­scape is chang­ing, with new ris­ing pow­ers like China and In­dia, whose cur­ren­cies may one day ri­val the US dol­lar. But the buoy­ancy of the green­back is a re­flec­tion of to­day’s re­al­ity: the US is the lone, sig­nif­i­cant bright spot among the world’s ma­jor economies. GDP in the third quar­ter grew an an­nu­alised 3.5 per­cent — far higher than other in­dus­tri­al­ized economies. That’s why the Fed­eral Re­serve has wrapped up its lon­grun­ning and highly un­ortho­dox eco­nomic-stim­u­lus pro­gram known as quan­ti­ta­tive eas­ing, or QE, which, by spilling a tor­rent of dol­lars into global fi­nan­cial mar­kets, was one fac­tor be­hind the cur­rency’s weak­ness in re­cent years.

Mean­while, most of Amer­ica’s key trad­ing part­ners are head­ing in the op­po­site di­rec­tion. The Euro­pean Cen­tral Bank (ECB) is widely ex­pected to start its own QE pro­gram to try to com­bat po­ten­tial de­fla­tion and jolt sag­ging growth in the euro zone. That’s why the euro’s value against the dol­lar has been sink­ing to lev­els last seen two years ago. If the ECB does act, down­ward pres­sure on Europe’s common cur­rency will likely in­ten­sify.

In Ja­pan, the cen­tral bank on 31 Oc­to­ber sur­prised mar­kets by greatly broad­en­ing its own mon­e­tary­ex­pan­sion pro­gramme in an at­tempt to res­cue Prime Min­is­ter Shinzo Abe’s stum­bling ini­tia­tives to re­vive the longslum­ber­ing Ja­panese econ­omy, nick­named Abe­nomics.

The yen tum­bled to a seven-year low against the dol­lar as a re­sult. Re­search firm Cap­i­tal Eco­nomics pre­dicts that the Bank of Ja­pan’s (BOJ) ac­tion will help push the Ja­panese cur­rency all the way down to 120 yen to the dol­lar by the end of 2015, from about 112 to­day.

The dol­lar has been gain­ing against some emerg­ing- mar­ket cur­ren­cies as well. Faced with slow­ing growth and the strain of eco­nomic sanc­tions, Rus­sia’s ru­ble has been hit­ting re­peated all-time lows against the dol­lar.

Not even an in­ter­est-rate hike by Rus­sia’s cen­tral bank on Fri­day has been able to stem the slide.

On top of that, though that pres­sure has eased, the cur­ren­cies of In­dia, In­done­sia and many other emerg­ing economies still have not re­cov­ered their strength from when they tanked last year, after the Fed first sig­naled it was scal­ing back its stim­u­lus ac­tiv­i­ties.

How long can the good times roll for the US dol­lar? That de­pends on many fac­tors, from the fu­ture growth of US GDP to the health of the global econ­omy and up­com­ing Fed de­ci­sions on in­ter­est rates. Yet with cen­tral-bank pol­icy in the most ad­vanced economies sharply di­verg­ing — the Fed tight­en­ing, the ECB and BOJ loos­en­ing — the dol­lar could see con­tin­ued gains. Some econ­o­mists be­lieve the con­di­tions are in place for an ex­tended pe­riod of dol­lar strength, per­haps last­ing sev­eral years. “The build­ing blocks are still in place for a sus­tained dol­lar rally,” an­a­lysts at fi­nan­cial gi­ant Bar­clays con­cluded in a re­cent re­port.

The fact re­mains, too, that no other cur­rency has emerged to truly ri­val the dol­lar as the world’s No.1 choice. The un­cer­tain sta­bil­ity of the euro was ex­posed by its mul­ti­year sov­er­eign-debt cri­sis and the chaotic re­sponse to it from Europe’s lead­ers. And even though Beijing has high hopes to trans­form the Chi­nese cur­rency, the yuan, into an in­ter­na­tional pow­er­house, pol­i­cy­mak­ers there have been ex­tremely slow to in­tro­duce the fi­nan­cial re­forms that would make that a real pos­si­bil­ity.

Of course, there are still longterm fac­tors at play that could knock away the pil­lars of dol­lar dom­i­nance. Rus­sia and China, for in­stance, re­cently pledged to set­tle more trade be­tween the two na­tions in rubles and yuan. But for now, the dol­lar reigns supreme, as well it should. — Time

no other cur­rency has emerged to truly ri­val the dol­lar as the world’s no.1 choice.

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