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Mix-Ansicht- Economist zum Dollar. - El Sheik, 30.11.2003, 23:00
Economist zum Dollar.
-->I’d buy that for a dollar (and two dimes)
Nov 28th 2003
From The Economist Global Agenda
The euro is worth $1.20 for the first time in its history. That may hurt Europe. Will it help America?
TIME to hail the almighty euro? During trading on Friday November 28th, the currency was worth $1.20 for the first time in its history. Europe's exporters will bewail (not hail) this development, but for everyone else involved in the European project, the currency's strength will bring some satisfaction. After being introduced at a rate of $1.17 in 1999, the euro slumped to become worth less than 83 cents the following year. But the euro’s weakness in those humiliating days was not evidence of a congenital defect in the new-born currency. Rather, it reflected the unusual strength of its older rival, the dollar. Likewise, the euro’s rise since February 2002 should not be taken as a great vote of confidence in the economies of the euro area. It is, instead, the flipside of the dollar’s fall.
What is pulling the dollar down? For one thing, America is currently spending over $500 billion more per year than it produces. To finance this unprecedented current-account deficit, it needs to attract about $2 billion of foreign capital every business day. Much of that capital comes from Europe. Every month from January to August of this year, Europeans poured an average of $28 billion (net) into American stocks, bonds and notes. But in September they reversed course, selling off $403m. Their second thoughts are easy to explain: if the dollar loses value, Europe’s dollar investments are worth less in their own money. But some wonder if Europe’s doubts will endure beyond that one month. Since September, after all, America has posted breathtaking third-quarter growth rates and healthy corporate profits. Surely the prospect of higher returns will entice Europeans back into American assets, despite the Damoclean dollar hanging over their heads? Maybe, but this week’s currency traders don’t seem willing to bet on it.
Of course, one reason the dollar has fallen so sharply against the euro is that it cannot fall freely against Asia's major currencies. China’s authorities have kept the yuan controversially pegged to the dollar and Japan’s have spent well over ¥13 trillion ($120 billion) so far this year to keep the yen's value down. Asia’s central banks do not buy dollars as a rational investment; they are not looking for the best mix of risk and return. They are buying dollar assets to keep their own currencies competitive. If they think the dollar is going to fall, they may well buy more of them, rather than less.
Some, such as Peter Garber of Deutsche Bank, see Asia’s official purchases of dollars as part of a grand bargain: Asia ploughs its savings into America, and America, in return, remains open to the products of Asia’s export industries. But protectionist pressures rising in Congress raise worries that America may fail to keep its side of the bargain. If so, the central banks of Asia, the dollar’s most loyal customers, may threaten to switch, or at least spread their allegiance to euros. That would put intolerable pressure on the dollar. It would also drive up American interest rates, as Asian capital flowed elsewhere.
Though they will welcome the dollar’s steady decline, America’s authorities must tread carefully. Washington may complain about Asian currency manipulators, but without them the dollar could easily go into free fall. As Stephen Jen of Morgan Stanley points out, Washington’s best hope for a soft landing is for East Asia to try but fail to resist the dollar’s fall. America wants enough Asian money flowing into American assets to keep yields (and therefore interest rates) down, but not so much as to keep the dollar up. In so far as a “dollar policy” exists, it is being set in Tokyo and Beijing, not in Washington.
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