Monday, October 12, 2009

Weak dollar conspiracy theories are moot

Business Times - 13 Oct 2009

Weak dollar conspiracy theories are moot

There may be very good reasons why the Arabs, Chinese and Russians should meet


NEWS reports about the ups and down and the US dollar tend to be buried in the business sections of American daily newspapers and heated discussion about this somewhat technical and esoteric subject are usually confined to a relatively small circle of investors and financial analysts.

Last week, however, the greenback ignited excitement - and not only among currency traders - after The Independent, a London daily, came out with an explosive scoop on Monday suggesting that officials from the Arab oil sheikdoms, Russia and China were working together to find ways to stop using the US currency in order to set the value of oil deals.

The report by veteran Middle East correspondent Robert Fisk had all the making of a espionage thriller in which shadowy conspirators - Arab sheiks, ex-KGB agents, communist Chinese operatives and apparently even several French financiers - were meeting in secret locations in Abu Dhabi, Moscow and Beijing and devising a plan to attack the mighty greenback, challenging its global supremacy and setting the stage for the collapse of the American strategic and economic superpower.

But these days the US financial power is in decline and it is now the world's largest debtor nation. So for Chinese, Russian and Mid-Eastern officials to toy with the idea of ending the status of the US currency as the global economy's reserve currency is only to be expected.

Mr Fisk's exclusive didn't sound as fantastic as it would have a few years ago. That may explain why the report seemed to have be taken seriously by traders worldwide who were pushing the value of the greenback to new lows while gold jumped to US$1,048.20 per ounce at one point.

Mr Fisk's story helped 'gold bugs' make huge profits and this has given birth to conspiracy theories in the US suggesting that gold traders may have 'planted' the story in The Independent.

But even if the story is not true, it draws attention to the huge problems facing the American economy that could affect the long-term global status of the US. The value of the US dollar has been declining relative to almost all other major currencies and to gold.

Hence, the financial meltdown and the ensuing economic crisis hasn't only tarnished the American economy but also highlighted the economic power of China that seemed to have taken upon itself a major role in financing the widening US deficit.

At one point during the crisis, the US central bank flooded the world with US dollars in order to revive the financial markets. But printing more US dollars and more borrowing from abroad by Washington to finance its budget deficit, reduces the value of the greenback.

So it's not surprising that protecting the greenback has become a large part of the challenge facing US policymakers. They recognise that the perception in China and elsewhere is that Washington is trying to spend itself out of the recession - a process that could produce larger deficits. This could diminish the appetite of foreign investors to continue buying US treasuries and put further downward pressure on the US currency. It could subsequently bring about an increase in interest rates and make it even more difficult to continue financing the US debt.

Using the US currency for pricing oil has been a major advantage for the American economy - but as the value of the greenback continues to fall, exporters of oil and other commodities are finding themselves at disadvantage.

In the past, oil producers in the Middle East were willing to pay the economic cost of a diminished US dollar in exchange for American military protection. But the perception that the costs of the wars in Iraq and Afghanistan could force Washington to start reassessing its military commitments in the region could create conditions in which Saudi Arabia and other oil producers would be less inclined to employ the US currency in setting the price for oil.

At the same time, the growing difficulties facing the Americans in paying their debt could force them to reduce their spending on defence and diminish their geo-strategic status, especially in the Middle East.

Of course, Obama Administration officials have continued to express their support for stabilising the value of the US dollar. 'It is very important to the United States that we continue to have a strong dollar,' Tim Geithner, Treasury secretary, said during the weekend. 'We recognise that the dollar's important role in the system conveys special burdens and responsibilities on us and we are going to do everything necessary to make sure we sustain confidence.'

But this is a time when the job market remains in distress. US officials understand that a weaker US dollar helps make American products cheaper abroad, boosting American exports and creating new jobs at home; and that is exactly what the Obama Administration and the Democrats need as they prepare for the 2010 midterm Congressional races.

Hence, there is no desire in Washington to cooperate with other leading economies in taking steps to make the US dollar stronger. In fact, from the perspective of Washington, a weaker US dollar that helps increase US exports and reduce American consumption of foreign imports could prove to be an effective tool in correcting the current imbalances in the global financial system - one of the major goals stated by members of the G-20 economies in their recent meeting in Pittsburgh.

So never mind conspiracy theories. There may be very good reasons why the Arab oil producers and the Chinese and the Russians should meet to rethink the status of the US dollar.

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