Another Day, a Weaker Dollar

The financial crisis has intensified the debate over whether the dollar should remain the world's dominant currency.
The financial crisis has intensified the debate over whether the dollar should remain the world's dominant currency. (By Mark Wilson -- Getty Images)
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By Anthony Faiola
Washington Post Staff Writer
Wednesday, June 24, 2009

The days of calling the dollar almighty may be numbered.

Since World War II, when the dollar eclipsed the British pound as the king of world currencies, the United States has reaped the rewards of its monetary strength. The greenback's sense of indestructibility allowed the U.S. government to borrow cheaply and gave rise to an era of rich American globetrotters toting the world's most easily convertible form of cash.

But the financial crisis that started in the United States is dramatically intensifying the debate over the future of the dollar, and whether it can, or should, remain at the top of the financial food chain. Although a meaningful shift away from the dollar is likely to take years or more, some analysts believe that the debate is now reaching a tipping point.

Last week, the leaders of Brazil, Russia, India and China -- whose governments are some of the world's largest dollar holders -- jointly declared the need for a "more diversified international monetary system," sparking a drop in the greenback on world markets. In recent months, China in particular has led a campaign for a new world monetary order, arguing that the financial crisis has exposed profound vulnerabilities in the U.S. economy and financial system. Those flaws, critics argue, show it is simply too risky for the world's central banks to rely largely on the dollar for their global reserves.

At the same time, Beijing has taken unprecedented steps to increase the international role of its own currency, the yuan, to a level commensurate with China's relatively new status as a major economic power. In the coming weeks, the International Monetary Fund -- the institution charged with the monitoring and stability of the global economy -- will issue a vast amount of currency-like assets known as Special Drawing Rights, which some analysts see as a long-term substitute for the hordes of dollar reserves being held by central banks around the world. Some now envision that the dollar will fall from its recent levels of 60 to 65 percent of international reserves to less than 50 percent a decade from now.

A diminishing of the dollar's global role has far-reaching implications for the United States. The value of the dollar versus other major currencies could markedly drop as it slips from supremacy, making millions of Americans overseas feel poorer while potentially fueling a new golden era for U.S. exporters as American goods become more cost-competitive. The U.S. government may also be forced to pay higher rates to investors when selling, for instance, Treasury bonds to raise cash -- making it far more costly in the future to cover the kind of massive stimulus spending the government is now undertaking.

"The dollar's global status has allowed the U.S. to have a free pass on financing our deficit as opposed to countries like Brazil, who are punished by international currency investors for risky behavior," said Martin Weiss, author of the "Ultimate Depression Survival Guide." "But if the dollar is no longer the currency everybody wants or must have to continue doing business, that is going to be much, much harder to do."

Despite the current campaign to lessen the dollar's role, analysts note that there has not yet been a major push by foreign governments or private investors to shed it. In fact, over the course of the financial crisis, the dollar -- which had been on a downward trajectory for months -- has actually strengthened against major currencies, including its closest rival, the euro.

That is partly because even nations like China -- with the world's largest dollar-denominated reserves, at close to $2 trillion worth -- have shied away from dumping the dollar, fearing it could trigger a global run that would severely damage the value of their holdings. Additionally, other mighty currencies like the euro have lost their chance to claim the dollar's crown because their issuing nations are in even worse economic shape than the United States. In times of crisis, the dollar, as well as dollar-denominated U.S. Treasury bonds, are still seen as safe havens.

"The U.S. had to screw something up to lose the dominance of the dollar, and you could argue that the U.S. starting a global financial crisis is a pretty big screw-up," said C. Fred Bergsten, director of the Peterson Institute of International Economics and a top economic official during the Carter administration. "But the Europeans haven't been able to take advantage of that to advance the euro immediately, largely because they've made some pretty big screw-ups themselves."

That said, economists including Bergsten are now saying the end of the dollar's dominance appears increasingly inevitable. During the 19th and early 20th centuries, for instance, the British pound enjoyed a similar supremacy. It gradually lost that role as Britain's empire crumbled, was devastated by two world wars and saw the United States emerge as the world's dominant superpower.

By the same token, economists see the current financial crisis, and the doubts it has raised about the U.S. economy, as accelerating the creation of a new economic order. The easy monetary policy embraced by the Federal Reserve to spark a recovery -- including zero-interest rates and the printing of cash to support stimulus spending -- is also working against the strength of the dollar.

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