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Gas market complaints cite failure of U.S. commodity trading regulation
Dollar Fall Will Come at a Price for All
By Mike Dolan
Economics Correspondent
Reuters
Sunday, November 21, 2004
http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=6876686
WASHINGTON -- The United States is set to turn a blind
eye to the sliding dollar and a deaf ear to protests about
its fall, but experts smell trouble for all in what looks like
an effective devaluation of the world's reserve currency.
While a messy, uncontrolled slide in the dollar may help
cut record U.S. trade and budget deficits, it transfers the
pain to its creditors and could rebound on the United
States by inflicting a longer-term dent on the dollar's
prized reserve currency role.
The risk that central banks around the world look to
diversify their holdings away from dollars was highlighted
by Federal Reserve Chairman Alan Greenspan on Friday.
In a speech seen to accept the inevitability of a dollar
decline to help ease U.S. deficits, Greenspan warned
foreigners face an "unacceptable amount of concentration
risk."
With too many of their eggs already in one basket, he
said, foreigners will be increasingly reluctant to bankroll
rising U.S. trade and budget deficits with ever more
purchases of its bonds, equity, and other assets without
much higher returns.
In the absence of more concrete efforts to rein in the
budget, economists said that Greenspan was explaining
the logic that the dollar will take the heat.
Many economists agree and say this should be a big
concern for both U.S. policy-makers as well as U.S. c
reditors.
"Further substantial increases in the U.S. net debtor
position would raise the prospect of a substantial U.S.
dollar depreciation, with the associated capital losses
inflicted on its creditors," said Philip Lane, professor of
international macroeconomics at Trinity College, Dublin.
"In turn, this may threaten the special status of the
dollar, also in light of the emergence of the euro as an
alternative reserve currency, and raise the rate of return
required by foreign investors on dollar instruments."
Despite the emergence of the euro five years ago, more
than two-thirds of foreign reserves -- well in excess of
$2 trillion -- are still banked in dollars and U.S. bonds.
The decades-old reputation the dollar has as a liquid,
long-term store of value means the United States has
to date received cheap and risk-free foreign funding in
its own currency from foreign governments seeking to
bank their reserves safely.
Foreign central banks, for example, are set to finance
some 60 percent of the U.S. budget deficit for 2004.
But this cheap financing has, in part, allowed the U.S.
budget and trade deficits to blow out to unprecedented
levels without any penalty on the U.S. government and
has heaped pressure on the dollar to weaken to keep
attracting investment.
Resisting this dollar fall to keep exports competitive in
the United States, many central banks in Asia and
elsewhere have amassed even more dollars -- with just
Japan and China now holding more than a trillion dollars
in reserves to date.
But this arrangement may be reaching a breaking point.
"The concentration risk that Greenspan highlights is the
real problem for foreign central banks," said Phil Suttle,
international economist at JP Morgan in Washington.
"Greenspan is lecturing them on the risks they face
from preventing a market-led dollar decline."
For the central banks that have been financing the U.S.
deficits and propping up the dollar, the issue is whether
to stop now and take any dollar foreign exchange loss
on the chin or wait longer and sustain even bigger losses
down the road.
Economists say there is no really elegant way out, but if
you are in a hole, it may be advisable to stop digging.
A further decline in the dollar, already more than 25
percent weaker since President Bush came to power,
looks likely either way. Neither the U.S. Treasury nor
the U.S. Federal Reserve looks willing to stand in its
way.
Nouriel Roubini, associate professor of economics at
New York University's Stern Business School, said he
felt the "game" of foreign reserve accumulation was very
fragile and could be undermined sooner than many think.
Roubini, who was a White House and Treasury economic
adviser between 1998 and 2001, said it takes only one or
two smaller central banks -- like in India or Russia -- to
start diversifying reserves to undermine the whole process.
"The central bank accumulation is a game but it is a game
that can be played only if there is no free riding," said
Roubini, saying that the fear of a dollar slide would now
be worrying for many developing countries.
For example, he said, if China allowed the yuan to float
freely and the dollar dropped 20 percent, it would incur a
capital loss on its half trillion of reserves equivalent to
about 8 percent of its annual gross domestic product.
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