15 October 2009

US dollar in danger of being funny money

ELEANOR HALL: To economic optimism in the US now and the bulls on Wall Street are running today, with the Dow breaking though the 10,000 mark for the first time in a year.

But the fortunes of the US dollar, the world's reserve currency for 50 years, are heading in the opposite direction.

Investors are continuing to flock to the safety of gold which is posting record highs on a daily basis.

So can the greenback survive as the world's reserve currency?

From Washington John Shovelan reports.

JOHN SHOVELAN: The mantra of successive US governments since the mid '90s and a song continued by the Obama administration is that a strong dollar is in the national interest. But fewer investors are buying it or the dollar.

The IMF (International Monetary Fund) says central banks around the world hold about 62 per cent of their currency reserves in US dollars - the lowest on record.

Charles Goyette, author of The Dollar Meltdown, says investors won't hold a currency that is continually shrinking and isn't dependable.

CHARLES GOYETTE: The gold price is signalling to us the collapse of the dollar reserve standard, the dollar exchange standard. It's going on right now and we're in for a very tough period ahead.

JOHN SHOVELAN: Prospects for growth in the US economy are further undermining the dollar. In remarks seen as a signal that interest rates would stay at their all time lows, the US Federal Reserve's vice chairman Donald Kohn said a V-shaped economic recovery "is not the most likely outcome."

Frederic Mishkin, former Federal Reserve governor and who co-authored a book with Fed chairman Ben Bernanke on inflation targets, says those arguing for an interest rate rise to support the US dollar will have a long wait. He says recovery in the US economy could take several years.

FREDERIC MISHKIN: The kind of recovery we should expect to have is in fact not going to be a super strong one and we're going to have a tremendous amount of slack in the economy for quite a number of years. And if there's still a lot of slack there's no reason to raise interest rates. In fact it would be a big mistake.

JOHN SHOVELAN: Interest rates aren't coming to the dollar's rescue and investors think the Obama administration is relaxed about the falling currency. It's helping exports and the nation's trade deficit.

The US dollar has weakened over the past eight years and some private investors worry the annual trillion dollar budget deficits over the next decade and trade deficits will drive that depreciation faster so there's been a hunt for alternatives.

But that, according to Mike O'Rourke of BTIG, the global trading firm, is a long way off.

MIKE O'ROURKE: There's not many viable alternatives to the dollar right now over the next several years. Europe is not in a better position than we are. Japan is not in a better position than we are. The UK is easing, their quantitative easing is just as aggressive as ours.

And then the only strong large economy is China and they're pegged to the dollar and they don't have free capital flows.

You need, you know, a structure, financial infrastructure, free flow of capital, rule of law and then a strong military to be an important currency in this world as a reserve. And the fact is we still have all those things. No-one else meets up with the United States on all those marks.

JOHN SHOVELAN: It's become obvious though that Americans can no longer take their dollar's reserve currency status for granted.

A former US deputy assistant treasury secretary and now head of Encima Global, David Malpass is quoted saying, "Money wants to go to where it can get a steady return in real money, not in funny money. And in many ways the dollar is becoming the funny money currency for the world."

John Shovelan in Washington for The World Today.


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