Economic Downturn in the West Part III

6: Not everyone is equally happy

It does not only benefit the United States that the dollar is considered safe. In uncertain times, such as during the financial crisis in 2008 and during the turmoil towards the end of 2011, “all” financial investors wanted to enter the large and secure dollar market – they wanted their values ​​in dollars. The consequence is often that the dollar exchange rate rises, which has a negative effect on American exporters – the goods they sell become more expensive abroad. This could have a negative effect on the trade balance with other countries.

Several countries dislike the dominant role of the dollar . In this way, the news picture often focuses on the relationship between China and the United States. Through decades of trade surpluses, China has accumulated huge foreign exchange reserves – more than $ 3,000 billion . Most of these reserves are denominated in US dollars. China will thus lose big money, should the dollar fall in value.

Other countries are in a similar situation; China still stands out because of its large dollar stock. If China starts selling off dollars, the exchange rate will probably fall, and the country itself will lose money. This poses an obvious dilemma for the Chinese authorities. Regardless: It seems fairly certain that the central role of the dollar means that US fiscal and monetary policy will have consequences far beyond the country’s own borders. As former Finance Minister John Connally once stated: “The dollar is our currency but your problem”.

Fears of a weakening of the dollar and reduced foreign exchange reserves were probably much of the reason why several countries expressed strong dissatisfaction with the US Federal Reserve’s so-called quantitative easing – “printing” of money. The main purpose of the Fed’s acquisition of US securities was probably not to weaken its own currency (although it was possibly seen as a positive side effect), but rather to push down the interest rates that companies and households have to pay for loans.

However, lower interest rates in the United States can also be negative for some countries. Lower interest rates give investors less returns, making investments in the US less attractive. We can therefore imagine that some financiers want to relocate their funds to emerging economies, where the return is higher.

Although this may lead to the currencies of the recipient countries being strengthened in value, increased capital inflows are usually seen as something positive. But in some cases, especially in countries with poorly developed financial markets (few rules, weak control), capital flows can present major challenges.

The problem with international capital is that it tends to get in the way. In addition, large inflows of foreign capital are often associated with credit-driven (loan-driven) bubbles in the housing and stock markets . These potential problems have gradually received much attention, also among the economists in the “liberal” Monetary Fund (IMF). A certain, gradual change has taken place in the Monetary Fund – they accept more use of government management than a few years ago.

7: Is the status of the dollar threatened?

The global shift in economic power could affect the position of the dollar. History tells us that the international use of a currency goes hand in hand with the country’s economic strength. The British pound was the most widely used currency in the 19th century, while the US dollar took over during the 20th century. Will the Chinese currency, the yuan (RMB), dominate the 21st century? As the Chinese economy grows larger and becomes increasingly important globally, we should not ignore the fact that this will be the case. But it will take time. The currency is still nowhere near threatening the role of the dollar.

According to HANDBAGPICKS, Chinese authorities control their currency with an iron fist. For many years, they kept the exchange rate stable against the dollar, but in recent years they have allowed a gradual (and controlled) strengthening. This weakens the international competitiveness of Chinese exporters. How do they manage such a strict control of the currency? The answer is that they do not allow free movement of capital – foreign players can not freely buy and sell yuan (also called RMB), as they can with most other currencies. However, the Chinese are gradually liberalizing their capital and foreign exchange regimes. Before international investors can trade currency as they wish, the yuan is unlikely to play a dominant global role.

There are also other possible competitors to the dollar, such as the euro, which after all is a relatively recent currency. Measured in economic strength, the euro should be relevant – the overall European economy is larger than the US. However, the sovereign debt crisis in Europe has weakened the impression of the euro as a safe currency. Many even doubt the future of the euro.

There are therefore many indications that the dollar will be the dominant currency for many years to come.

Economic Downturn in the West 3

You may also like...