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From The Times

November 13, 2007

Beauty deals a beastly blow to the US dollar

Gerard Baker: American view

The saga of the declining dollar has turned from a drama into a crisis.

We’ve got used to having Chinese officials hinting darkly that they might diversify their foreign exchange reserves out of the US currency, as they did again last week. We can even take it when Bill Gross, the world’s most influential bond investor, tells the public, as he did, also last week, that their investment strategy should consist of not buying anything that has a dollar sign attached to it.

But when Gisele Bündchen, the Brazilian supermodel, trashes your currency by insisting that she wants to be paid in euros, not dollars, it really hurts.

Since the dollar began its long decline against the world’s currencies in early 2002, the mantra from financial pundits has been that as long as the decline was orderly, everything should be all right. The dollar was overvalued; it would have to fall to get the current account deficit down – and economic fundamentals were against it. Wisely, of course, no one ever tried to quantify what exactly “disorderly” would look like. It was generally asserted that, like the difference between art and pornography, you would know when something had gone from being orderly to disorderly without necessarily being able to define it.

So, is disorderly best measured in terms of scale? If you had told a British investor six years ago that his weakly pound sterling would buy two dollars and ten cents in six years’ time, he would have reasonably presumed you were describing the end of the world. But then some people insist that the scale of the movement is not what matters but the speed at which it happens. You could still argue that the 35 per cent appreciation of the pound against the dollar and the 45 per cent rise of the euro in the past five years has been fairly steady.

Now, however, the pace seems to have picked up. The Canadian dollar is up against its cheaper US counterpart by almost 20 per cent this year. It’s hard to retreat in an orderly fashion at that kind of pace. And when the currency moves as much as 1.5 per cent in a day, as it did one day last week against the euro, then perhaps D-Day - Disorderly Day - has finally arrived.

And yet, for now, US policymakers seem unfazed. The Treasury will not change its increasingly comical verbal support formula of “a strong dollar is in our nation’s interests”, nor will it countenance – wisely – actual intervention to prop up the currency. Last week, the Federal Reserve, in the person of Ben Bernanke, gave a careful “on the one hand, on the other hand” assessment of the dangers of a rapidly falling dollar. No alarm there.

Abuse, of course, is being hurled at them from all quarters. From the Left, the dollar’s decline is seen as the global financial markets’ equivalent of the raised middle finger that greets President Bush almost everywhere he goes. They blame him for everything from the war in Iraq to Hurricane Katrina and say that the devaluation of the dollar is the hard market price of the loss of confidence in America’s leadership. This is not the place to argue about the merits of his policies, but I’d have thought it’s a bit of a stretch to say they’re to blame for the dollar’s weakness. Even if you think the currency movement reflects in part the strength of oil prices, which it may, you can’t really argue that is all about US policies. High energy prices still seem to be driven more by strong demand than geopolitical concerns.

From the Right comes even fiercer criticism. The obsessive types who think that everything went wrong when the world went off the gold standard 80 years ago - and who continue to have a suprisingly large following in America – say that the Federal Reserve has debased the currency. It is tiresome to have to listen to this rant about how the Fed’s rate cuts in 2001-03 undermined faith in the US dollar and how the latest easing has weakened it further. It’s not wrong, of course, to state that lower interest rates are likely to reduce demand for a currency, but what exactly was the alternative?

The US central bank averted a recession with its loose policies. Would the dollar be stronger or weaker now if the United States had had a nasty recession in the past five years?

Two factors are driving the dollar lower. The first is the steady, benign but unsettling unravelling of the financial imbalances that have haunted the world for five years. US growth is weakening relative to other developed countries and the current account deficit is narrowing. These are both desirable, but destabilising.

The other factor is increased discretionary demand from the world’s central banks to diversify their currency reserves out of dollars. This is often hailed, especially in Europe, as a sign of America’s declining global power, but the reality is that some rebalancing of global currency portfolios was necessary and inevitable. For years the US has provided a fifth of world demand and four fifths of world reserves.

The increased demand for euros does not signal either, as some claim, investors’ preference for European policy or the rise of a European superpower. Europe’s long-term relative economic decline remains on track. A stronger euro does not betoken a resurrection anytime soon.

History repeats itself. America is going to see another 1930 s style correction. Will the society hold up as well ? The 2008 race will come down to Clinton vs. Romney. They are choice of the Corporation America. We The People be damned.

roland buzenius, three rivers, michigan

American mania for filling huge "gas" tanks and giving their wealth to Middle Eastern camel jockeys for slimy sludge -- that's the real drain on the dollar!

Burt, Market Rasen,

I place the blame squarely on Dubya for taking us from record surplus to record deficits; and thus a weak dollar.
1) Lied to the country to get us into Iraq. Spent Trillions to tear up Iraq and Afganistan. This had the side-effect of increasing the price of oil due to decreasing stability in the middle east.
2) Spent Billions more attempting to rebuild Iraq and Afganistan.
3) Toughened bankruptcy laws wrt credit cards, while allowing usery (exhorbatant interest rates), thus even those who loose their homes will pay-off their credit cards.
4) Cut taxes (primarily for the rich) - "play-go" not "pay-go".

Paul, Union City, NJ

This is a thought-provoking piece that is generally well argued but it appears that the inventors of Capitalism have just played their best poker hand at the right time. Let's have this discussion again in three years and see what Mr Baker's perspective is then.

Thomas, Mooresvile, NC

USA has spent $500Billion in Iraq, this is what has destroyed the value if the dollar, not interest rates, or even Gisele BÃ¼ndchen

Mark, Bristol, UK

You failed to mention the Iraq war and trillion dollars paid or to be paid by printing money. Trade balance is over $700 million. Inflation is out of control. Inflation is up in energy and food not counted in base inflation and not reflected on a forward looking basis. Taxes and medical insurance and other cost not reflected.

We are getting wacked by an administation which does not understand you can not spend more in the world than you receive from the world without impacting the value of the dollar.

Mendel Peterson, Sandy, Utah

The US Dollar may have been copying its Zimbabwe namesake and going down the toilet, but the Pound Sterling has been following it down. This doesn't seem to have been mentioned in the British press.

From the data in the article, it has fallen over 10 percent against the Euro. 100 Euros now cost me over 75 GBP, it usually costs just under 70 GBP.

This is starting to hurt all those (estimated 5 million) who have incomes in that little local currency, the pound Sterling, and are living with a strong stable currency, the Euro.

Even in currency matters, Brown is still Bush's lapdog.

Brian Vallance, Corfu, Greece

The dollar seems to be behaving like some of these sub prime loans. It is going down and will really be in trouble when it looses its reserve currency status. When that happens, it may not be the end of the world but it will be close.
You can't continue to be the worlds greatest debtor for ever and also engage on these hugely expensive foreign adventures - someone is eventualy going to ask are these dollars worth anything anymore now there's so many of them around? They are after all only promises not backed up with gold. ( or in fact anything )

Diddly Do, Liverpool,

All the doomsayers and Bush-blamers must be getting a little nervous- there's not that much time left in his term for all their dire predictions to come true.

I'll make my own prediction- a whole industry of criticism that holds Bush as the villain for everything wrong in the world is going to come to an abrupt end one year from now. It will be interesting and amusing to see these people flailing about for a new scapegoat.

gb, Austin, USA

Some repositioning of the Dollar versus Asian currencies is quite logical as Asian economies begin to thrive. But beware Asia's near toatal dependence on China's continued RAPID growth.
However, the strengthening of the Euro Versus the Dollar is more perplexing given that the fundamental strength of the US economy is better than Europe, IMHO. My conclusion is that we are in a typical over reactionary movement downward for the Dollar versus the Euro and this is NOT the time for investors to place futher monies in the Euro at these levels. For people in Europe (especially the UK) enjoy your strong currrencies and please visit the USA and buy from our shops. This may be a once ina lifetime opportunity so take it now..

Ian, Madison, NJ, USA

Patricia BÃ¼ndchen, sister and manager of Gisele BÃ¼ndchen in the model's official web site denied this story about Euros, she claimed that's not true.

Nelson Varela, Recife, Brazil / Pernambuco

No mention of oil in your otherwise informative article. It would appear to me that there is some link between the price of a barrel of oil, which is denominated in U.S.dollars, and the current value of the U.S currency.Saudi Arabia is currently in the middle of massive investment within their country before the oil runs out.Most of the Saudi imports are not from the U.S.A. so they require more euros and sterling to pay for them with near worthless dollars.

Alexander, London, England

The way the Bush administration manages economic affairs, one would think that a half century of theory and policy in economics never happened. To be fair about, for them it didn't.

FRANCIS X. HEALY, JR., WARRINGTON, PA US

As an expat businessman who lives in the US, I find that a lot of the trouble here is with American companies' attitudes as far as clients are concerned. On more than one occasion, I have found executives in US companies act as if they did not want to sell something to me when I went to them with an order. How on earth do you do business with someone who does not even want to sell you stuff when you offer to pay them in advance?

Contrast this to Canada where I recently wanted to buy some raw materials from for a client in India. From the CEO of the port who went out of the way to put me and my very American business partner in touch with shipping companies to the company that owned the material that I wanted, there has been nothing but polite co-operation. Is it any wonder that the Canadian dollar which was 1.60 to the USD just three years ago is now worth more than the US dollar is? Frankly, I do think American companies need to be less arrogant if the economy here is todo well.

Mehul Kamdar, Des Plaines, IL, USA

Working in the US Manufacturing sector, business couldn't be better. Lots of work coming from Europe, Canada, Japan. You folks can have that strong Euro. This is the best thing that has happened to me in a while. BMW's just got 40% more expensive.

Paul Charron, Boston , MA

Americans know how to work their way out of a crisis...but perhaps they have taken on too much global responsibility (war) this time. The financial costs of this coupled with the cost of Katrina and slowing economy may be too much. Hopefully Fortress Europe will prove self-sufficient enough to ride out the storm.

Tony, London, UK

The so-called 'war on terror' has consumed billions of dollars with precious little beneficial result and seemingly little regard for the enormous amount of debt future generations will have to contend with. Yet, domestically, still no comprehensive rebuilding of Katrina-wrecked New Orleans, no move to introduce decent health care for ALL Americans, and no meaningful environmental protection legislation.
Is it any wonder therefore that the U.S. dollar has plunged in value throughout the world. Worse yet, so has its credibility as a world-leader.

Colin Cumner, Adelaide, South Australia

A man just left a major USA financial company after losing more than a billion dollars. His firing package was 116 million dollars, A third baseman left the NY Yankess and is asking for ten million a year as salary. Do you really have to ask why the dollar is falling?

lycurgus, Nashville, USA/Tennessee

Hey Tim from Harlem....did you take your tin foil anti-alien message hat off again?...lol

As for Mr. Baker's article and the rest of you "lucid" commentators here...lol. You're pretty much over my head on this topic. But I've lived long enough to say one thing. Don't sweat it...it will all come around.

Murph, Madisonville , USA/KY

Would the dollar be stronger if the U.S. had a recession 5 years ago? Of course it would, the U.S. would now be on the up having cleaned out the accumulated financial detritus of years of lax fiscal policies. If you don't understand that a day of reckoning has to be faced for the self-serving and politically expedient actions taken by politicians and central bankers, then you should not be in the business of writing about economics.

A.Scott, Bangkok, Thailand

Indeed, the saga of the declining dollar... blame it on the former Fed's propensity to play politics and now what you've got is the mortgage crisis on top of a brutal capital flight that will, sooner or later, bring America to its knees. The smart money are unloading everything dollar-denominated. Another election is looming and the new Fed have got to find the moral power to resist the siren's call of politicians, if not the dollar will sink to the bottom.

Costanzia, La la land,

Given the G7 intervened in 2000 when the euro was 80 cents to steady the trend-why would they not considering doing the same to stem the one way bet mentality that now exists??
A crashing US dollar is in no ones interest and the only person in Goverment with the balls to speak sense is the French Prime minister-which must be a first in itself.

peter cunningham, Edinburgh, Scotland

Peter from South Yorkshire, I agree with your last paragraph about running up debt, no policy to reduce it and how this debases the currency. Trouble is I see all the same indicators in the UK with Brown and this Labour Government over the past ten years. In fact I think its worse in the UK, how long before Briatin has to go to the IMF for a loan!

chris, woodbridge, woodbridge

Diversification of forex reserves is indeed an inevitability, and a desirable one. The Euro is one obvious beneficiary with its large economy that is reasonably well balanced finacially. However, there is something missing: an Asian equivalent of the Euro. Asia represents more of the global economy than either the US or Europe and its influence is set to grow enormously. But there is no Asian equivalent of the Euro yet.

If one can be developed over the coming decade then we would have a tripolar reserve system that should be more stable than the unipolar one that has existed since the break up of the Bretton Woods system 35 years ago.

oldasiahand, Guildford, UK

The U.S. dollar will fall to the bottom. The u.s. government is planning to have another stock crash so they can institue Martial Law in a easier, "slier", fasion. This seems to be a drastic and theoretical situation. The darkness of the u.s. government has been shaded by the "dumb-downed" president George Bush. He has been quoted of saying America and the world need "a New World Order" and " a police state." His dream of Global banks and a mass police state will help him and other world leading high class people take over the masses. These people are often seen at Bilderberg meeting held in Ottawa, Canada. Author Daniell Estulin infiltrated these meetings and wrote a book. "David Roethchild, the Rockefellers and the Queen have been seen at these meetings." Not characteristical of global leaders to be together like this. Immortal Technique said it best,"martial is commin' soon to the hood to kill you, while your haning your flag outside your project window." THE U.S. STOCK CRASH---SOON

Tim, Harlem New York, United States of America

I am really surprised at Gerard Baker - he usually writes good sense about USA and UK economic matters, but in this article he is either blind to the facts or deliberately obfuscating.

Whatever one may think about Clinton's politics, it cannot be denied that his economic policy was conservative and wholly beneficial. He left the finances of the USA not only in the black but well on the way to eliminating its debt within ten years.

Since Bush has been President the USA has spent money like a maniac with no regard for income. It now has its bigggest debt ever with no policy to reduce it. It is basic economic knowledge that any country which does this debases its currency and runs up enormous debt. That this has been allowed to happen under a Republican administration is inexcusable. Republicans have only themselves to blame if Americans remember this for a long time.

Peter Lloyd, BLACKER HILL, South Yorkshire

"The US central bank averted a recession with its loose policies."

Yes, but in the long run, it might have made more sense to take the pain of a recession then than store up more trouble for the future. Surely frequent, short economic corrections are preferable to the buildup of unsustainable debt followed by a depression. The US and UK have both been living on the tick for a decade which is not a healthy state of affairs.

Saver, UK,