Author: Dan Keeler

Goodbye, Greenback?

If you take a glass-half-full approach, the state of the US’s finances is not so bad at all.There are still plenty of buyers for its treasuries, the dollar is adjusting to a level that makes US exporters happy, and despite that fact that interest rates are still at record lows, inflation is barely registering. Sure, there’s a bit of a hole in the current account, and the trade figures are looking a little out of balance, but that’s what happens when you’re driving the entire world’s economic recovery, right?

That argument would be fine but for one factor: the euro. While most discussions about the two currencies focus on the exchange rate, there is another, perhaps more important, factor: prestige. Suddenly,we’re facing the prospect that the euro is a viable global currency.Already, many of the world’s central banks are holding a significant amount of their foreign reserves in euros. If the dollar’s value continues to slide, many more will be doing so—and those that are still holding all their reserves in dollars will be counting the cost.

If the central banks do begin to bail out of the greenback en masse, their concerns become a self-fulfilling prophecy as they sell dollars to buy euros.And it’s not just the central banks that are taking the shine off the dollar. In an uncharacteristically clear statement last month Fed chairman Alan Greenspan voiced his concern that “foreign investors, both private and official,”may begin to spurn the dollar, which would choke off business investment and growth in the US.

Meanwhile, reports coming out of Europe suggest that some of the world’s most forward-looking money managers,members of the Russian mafia, have switched to the euro as their currency of choice. One reason is that the €500 note represents more than six times the hard cash of a $100 bill, the mafia’s former basic accounting unit.

So, what if the dollar were to lose its pre-eminent position as the world’s most exchangeable currency? This might seem like an unlikely scenario.After all, the dollar’s been round the block a few times and still maintained its position as the de facto global currency. But last time it faltered there was no single currency ready in the wings to steal lead role.

This time it’s different.

Dan Keeler