Photo: University of Berkeley
The idea that the dollar's status as world reserve currency will end is still very much alive, gaining strength after the start of the financial crisis. The economist Barry Eichengreen anticipates a new world order in the forex market, in which the dollar will at least have to share his reign with other currencies, with significant changes globally. Eichengreen
is not as well known as Nouriel Roubini, Kenneth Rogoff, and Robert Shiller. But Professor at the University of Berkeley has earned the respect of his colleagues, who consider him, along with those mentioned above, one of the most influential economists in the post-crisis, according the British weekly The Economist .
In a lengthy article published in The Wall Street Journal, a review Eichengreen of the reasons why the dollar has become the world currency (85% of world trade is conducted in dollars, 60% of central bank reserves are in dollars), lists what is now changing and anticipates the new future of global exchange rate system, where the greenback will no longer be the only reference.
"I think in the next 10 years we will see a profound shift towards a world in which different currencies compete for supremacy," says Eichengreen . And the impact of this change will be profound, with implications for the stability of exchange rates, the ability to finance U.S. the movements of the Federal Reserve and the financial system. Overall, the system will be less favorable to the United States.
The reasons for the supremacy of the dollar
To understand what can happen, the economist said first pillars on which the dollar has settled. First, its appeal reflects the depth of debt markets in dollars. The scale of these markets and the amount of derivatives to hedge currency risks make the dollar coin is more convenient to do business for large companies, central banks and governments.
The second reason is provided by refuge status has currency, as demonstrated by the strong rebound in the dollar after the collapse of Lehman Brothers. What reflects this status? The massive liquidity of the currency, as "liquidity is the most precious commodity in a crisis" , as Eichengreen. Liquidity is favored by the long history of stability of U.S. debt, which has become the most important asset for global investors.
Finally, for a long time, the U.S. currency has benefited from the absence of alternatives. Other countries, like Switzerland or more recently Australia, which are also considered stable, they are too small to play a role major international financial transactions.
eroded pillars
The Economist suggests that these three factors are losing weight. First, technological changes are undermining the dollar monopoly. Not long ago it was difficult to have space for more than one currency, as the difficulty of comparing exchange rates made sense to both exporters and importers, as investors and issuers used a reference, if only to avoid confusion. However, today it is very easy to compare prices of the currencies in real time.
addition, for the first time dollar has two serious competitors: the euro and Chinese yuan. Eichengreen points out that, contrary to what some announced, European governments have shown their commitment to the single currency and not have left, "nor will." In fact, assuming that eventually issuing Eurobonds (e-bonds , calls them) as part of the solution to the crisis. Thereby lay the basis an integrated European bond market that will function as an alternative to U.S. treasuries and that will be used by central banks to accumulate reserves.
Meanwhile, in the case of China, the Asian giant is internationalizing Yuan quickly: increase China currency deposits in Hong Kong, China companies conduct their international trade in yuan, has allowed foreign companies to issue yuan-denominated debt (the so-called dim-sum bonuses ) and even this month Bank of China in January began offering yuan deposits in New York. Eichengreen
admits that China has a long way to create a liquid market and make their financial instruments are attractive, but remember that the West has underestimated the Asian country in the past and should not make the same mistake.
Finally, economist believes that the status of shelter that keeps the dollar still goes to waste. So far, the safety of government bonds had not been questioned, but the huge debt and growing deficit, "will begin to ask questions about whether the U.S. intends to maintain the value of their debt and begin to inflate" . Investors will start to be reluctant to put all your eggs in one basket dollars. At a minimum, Eichengreen says, the dollar will have to share their refugee status with other currencies.
The world of the post-dollar
The first and most obvious change in this new world will be in the currency markets. There will be no an automatic jump in the dollar's value every time the financial volatility peek. With the new status of the euro and the yuan, there will be movement between the three reference currencies, but none of them will fire as did the dollar after the collapse of Lehman . Moreover, the stability will be the keynote: no reasons for large changes in exchange rates between them .
In the new landscape, life for U.S. companies will be more complicated. Until now, there had to incur costs to change local currency into dollars and did not have to buy financial products to protect against movements in rates change. However, in this new world, American companies will have to deal with as the same kind of risks that their foreign competitors.
contrast, companies and Chinese and European financial institutions will find it easier, since they can make international transactions in its own currency. Likewise, companies that primarily do business with China and Europe also use these currencies, without having to go through the dollar.
More problems will the U.S. government. First, there might be able to finance its deficit in a so cheap because the demand for Treasuries by central banks will be reduced. Nor will be able to sustain the huge trade deficits and current account deficits, as they will be much more expensive to finance.
To combat this situation, America will have to export more, and to export more, have to make their products more competitive. This means that the dollar must fall further.
Eichengreen According to estimates, the dollar must fall by 20%. As import prices rise, living standards will fall about 1.5% of GDP. "While there is an economic disaster, Americans I felt in his pockets. On the other hand, the next time the U.S. has a housing bubble, the Chinese are helping to inflate " concludes the economist.
- The euro and the yuan will emerge as alternatives to the dollar
- The dollar will lose its status as a refuge
- The new order will bring problems to the U.S. Government
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