Monday, December 24, 2007

Farewell to the US Dollar

At the beginning of 2003, one euro bought one US dollar. Eighteen months ago, it bought $1.20. Now it is pushing $1.50, and there is no reason to think that it will stop there.

Three of the world's biggest oil exporters, Iran, Venezuela and Russia, are demanding payment in euros rather than U.S. dollars. Only straws in the wind, but all in the past couple of weeks.

For the majority of Americans who do not travel abroad, the only visible effect so far of the dollar's steep fall has been higher fuel prices at the pump. The Chinese imports that fill the big-box stores still cost the same, only because the Chinese yuan is still pegged to the American dollar. But that may be about to change, along with many other things.

The main reason for the collapse of the U.S. dollar is President George W. Bush's attempt to fight expensive foreign wars while cutting taxes at home. "Ronald Reagan proved that deficits don't matter," as Vice President Dick Cheney told then-Treasury Secretary Paul O'Neill.

But they do matter to foreigners. As the U.S. dollar fell in value, the price of oil (which is usually calculated in dollars) rose to compensate for it, but there was no comparable adjustment for foreign central banks that had huge amounts of U.S. dollars in their reserves. China, which was sitting on about a trillion U.S. dollars, simply lost several hundred billion as the currency's value fell. So various central banks started wondering if they should diversify their reserves, and some acted on it.

Many countries are replacing part of their dollar reserves with a basket of other currencies, and those who have pegged their currency to the dollar are starting to cut loose from it: Kuwait has already done so, and the United Arab Emirates is actively considering it. If China unpegs, things will move a lot faster, but in any case the long farewell of the U.S. dollar has begun.

[Excerpt of article by Gwynne Dyer, Salt Lake Tribune]

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