Yellen
Holds the Key to Dollar's Decline (Die Welt, Germany)
"The U.S. economy is huge, but so are the debts the country
has accumulated over the decades. This year, 317 million Americans will produce
goods and services valued at roughly $16.7 trillion, according to IMF estimates.
However, federal, state, and local government debt is already higher than that,
amounting to almost $17 trillion. ... All experts agree that the future of the
dollar critically depends on the new head of the Federal Reserve."
The euro could
challenge the dollar in its role as reserve currency and China is already
calling for an end to U.S. dominance in the financial markets. But the greenback
still has a few secret weapons up its sleeve.
After
the most recent shutdown farce, we don't want to know how Washington would deal
with its creditors if U.S. Treasury really had no more money. Up to now, because
the debt ceiling is not an actual limit of government revenue but merely a
political battle line, the only shortages to bring the world's largest economy
to the brink of insolvency have been politically induced. For millions of
investors around the world, however, the near crash of U.S. government finances
represents another warning shot.
The
United States is of enormous importance to the global economy, and not just as
a major consumer and producer. Perhaps of even greater importance is its status
as the leading financial power. The dollar is the undisputed reserve currency,
and U.S. Treasuries are the preferred method of storing value for companies and
institutions around the world.
Even
before credit ratings agency Fitch threatened
to take away America's AAA rating, numerous
financial exchange strategists had already lowered their forecasts for the
dollar. For the experts, predictability is what is missing from U.S. politics.
In October alone, according to financial news agency Bloomberg, analysts have lowered their forecasts for the dollar by
1.2 percent, after a reduction of 1.7 percent in September and 1.2 percent in
August. Such a series of reductions is extremely rare.
China is
watching the developments with concern
Some
even go so far as to question the greenback as a reliable global currency. "Lasting
damage is being caused to the view that the U.S. currency is the reserve
currency," says
Bloomberg's Andrew Milligan, head
of global strategy at the insurance company Standard Life.
Currency
traders aren't the only ones following every detail of political developments
in Washington. China also casts a keen (and concerned) eye on developments in
the U.S. China's Central Bank holds $1.3 trillion worth of U.S. government bonds
in its portfolio. The country holding the second highest amount of U.S. government
debt is Japan, with securities valued at $1.1 trillion.
Both
Asian nations buy dollar-denominated securities to push down the price of their own
currencies. A decline in the value of the greenback (which is what the paper
dollar is called because of the color on the back of the bill) is something
they have to fear. Recently, this prompted a commentator from the pro-government
Chinese news agency Xinhua to call for a "de-Americanization"
of the financial world. Instead of the dollar, the world needs a "new
international reserve currency" that will give greater consideration to
the interests of emerging nations.
Some
observers see the Chinese renminbi
growing into this role. Since the exchange rate of Chinese currency was allowed
to float in July 2005, its value has already risen by 36 percent against the
dollar, and by 47 percent against the pound.
"Recently,
Beijing concluded currency swap agreements with several countries, the E.U.
included. This strengthens the importance of the yuan,"
says FolkerHellmeyer, chief
strategist at the Bremer Landesbank. The goal is
emancipation from global trade dominance of the greenback.
Problems remain
Arguments
against the dollar go along these lines: Even if a solution to the current
budget dispute can be found, fundamental problems remain unresolved. The U.S.
economy is huge, but so are the debts the country has accumulated over the
decades. This year, 317 million Americans will produce goods and services
valued at roughly $16.7 trillion, according to International Monetary Fund estimates.
However, federal, state, and local government debt is already higher than that,
amounting to almost $17 trillion.
It
is generally agreed that the United States will probably not go bankrupt, at
least not as long as the FED continues to step in with newly-printed dollars.
In fact, the Federal Reserve has been doing so zealously since the outbreak of
the financial crisis.
Will bond
purchases continue?
According
to the most recent data, the FED holds almost $2 trillion worth of U.S.
government bonds. That means that the FED is already ahead of China as largest
single creditor of the American state. The U.S. central bank now holds more
than 16 percent of all outstanding debt in its portfolio.
During
the summer, outgoing FED Chairman Ben Bernanke hinted that Treasury purchases
would be gradually scaled back. However, there has been no more mention of this
since. The turmoil these allusions created in global financial markets was
simply too severe.
The
stock exchanges and currency markets of emerging countries experienced a real
slump that was assuaged only after the FED retreated from its course of "tapering"
(scaling back of bond purchases). There are strong indications that America is
prepared forfurther devaluation of the
dollar.
"If
the FED continues to delay throttling back its bond purchases, it will be bad
for the dollar, "explains Christian Zima, a pension fund manager with Raiffeisen Capital Management. The liquidity this brings puts
the external value of the dollar under pressure, which is another way of saying
that the increase in liquidity isn't counterbalanced by an increase in goods
and services.
New FED chair
likely to stay old course
However,
a continuation of Treasury purchases is precisely what newly-designated FED
chief Janet Yellen advocates. As chairman of the Council of
Economic Advisers in the 1990s, Yellen backed cheap
money labor market policies on the part of government.
"The
discussion about a new reserve currency has come up repeatedly," says
Thomas Stolper, economist with U.S. investment bank
Goldman Sachs. Nonetheless, says Stolper, 61 percent
of all known holdings of foreign currency are comprised of U.S. dollars. At one
point in March, the percentage was 58%.
At
the time, many expected a rise in the value of the euro. But then came the European
debt crisis. Suddenly the greenback, despite its shortcomings, benefited from
its status as a "safe haven." The reasons for this are America's
large and well-established capital markets, as well as the interactions of
powerful Wall Street banks.
Not
everyone believes in the decline of the American currency.
"On
the contrary. In recent years, the dollar has again been able to solidify its
position as the reserve currency, " emphasizes UrsinaKubli, economist with Swiss bank Safra
Sarasin. The most recent figures from the Bank for
International Settlements showed that the dollar's share of daily foreign exchange
trading volume is significantly higher today than it was in 2010. "The
dollar's role as the reserve currency is undisputed."
The need for an
alternative currency
Goldman
Sachs expert Stolper recommends a differentiated
approach. In his view, if U.S. financial policy continues to be chaotic, the
need for an alternative reserve currency may well rise. The leading candidate is
the euro, which accounts for 24 percent of all currency reserves.
"In
the post-crisis era, the euro is in a better position to expand its role as reserve
currency, Stolper diagnoses. After all, the U.S.
budget deficit of 5.8 percent is twice as high as that of the monetary union. And
other economic figures also support the Old World rather than the new.
China's
economy is strong as well. However, despite recent liberalization, its capital markets
remain too closed off to establish a global currency. However, in a few years, things
may be quite different.
All
experts agree that the future of the dollar critically depends on the new head
of the Federal Reserve. In this, however, past experience suggests caution: Yellen will relieve Bernanke in 2014. Years of change at
the head of the FED have usually been the most dangerous for the dollar.