Slumping Dollar Still Has Clout But Some Worry That Greenback Is Headed For Second-Tier Status
As a banknote, the dollar isn’t much to look at.
With its drab green hue, stodgy typefaces and staid portraits of dead presidents, the U.S. legal tender is humdrum compared to the tropicalbird- and rain-forest-ornamented Brazilian real or the technicolor Dutch guilder. Even tiny Pacific island-nations have more picturesque paper money.
But the buck’s blandness belies its unrivaled power in international trade and finance. Despite the dollar’s recent pummeling on foreign exchange markets, its clout isn’t seriously threatened by other currencies, in the view of many currency traders and economists.
That doesn’t mean the dollar’s plunge against the Japanese yen and German mark - the world’s two other main currencies - is a nonevent with no practical significance.
On the contrary, it’s stirred intense debate about whether the dollar is headed, like the British pound earlier this century, toward second-tier status. Some say that could translate into rising U.S. inflation, higher borrowing costs and a feeling that we are all a little bit poorer.
Since it displaced the pound when England’s economic pre-eminence faded after World War I, the dollar has served as the world’s main reserve currency. That means it’s the trusted choice of foreign governments, companies and individuals.
Today, it’s the unit of measure for most cross-border transactions. OPEC sets oil prices in dollars. More international bonds are denominated in dollars than in any other currency. The dollar accounts for more than 60 percent of all monetary reserves.
The currency’s clout outweighs America’s 25 percent share of the world economy, giving the United States borrowing and buying power far out of proportion to its economic influence.
The U.S. Treasury’s borrowing costs are low partly because so many foreigners want to hold Treasury bonds, which are denominated in dollars.
But the dollar’s stature has slipped along with its value.
In 1985, a dollar bought 250 yen and 3.4 marks. Now it fetches 90 yen and 1.4 marks.
Economists argue over whether this spells trouble for the country. Does the dollar’s slide reflect some deep American economic malaise, or is it a healthy sign that the rest of the world has caught up?
Joel Kurtzman, an economist and a former editor of the Harvard Business Review, argues that the dollar’s dominance already has significantly eroded. He warns of negative consequences for the United States as the yen and mark gain at the dollar’s expense.
“The first bump is higher interest rates, the second is lower purchasing power, and the third is inflation,” says Kurtzman, who predicts the world will see a three-currency system in the next century.
David Bostian, chief economist for the New York investment firm Herzog Heine Geduld Inc., says the change doesn’t diminish the dollar’s critical function in the world, but reflects the realization that it “isn’t the only currency on the planet.”