Market ignores 'strong dollar' call

PUBLISHED : Tuesday, 13 October, 2009, 12:00am
UPDATED : Tuesday, 13 October, 2009, 12:00am

Officials of the Obama administration keep muttering their mantra 'strong US dollar', as if it is a magic spell that will protect them from the tough reality that the markets believe a weak dollar is what the United States really needs.

Last week, the dollar was spurred on its downward track on the foreign exchange markets by a news report that claimed leading oil-producing and consuming nations other than the US were trying to take the greenback down a peg and discussing pricing the fuel in a new basket of currencies rather than in dollars. If the report is accurate and the discussions prove successful, then the dollar's remaining days as the global reserve currency could be numbered in years rather than decades.

Kenneth Rogoff, the influential Harvard professor and former chief economist of the International Monetary Fund, reckoned that the international financial crisis had reduced the dollar's likely continuing reign from 75 years to 40 years. If oil is no longer priced in dollars, it would probably mean toppling of the US currency in 12 years or maybe fewer, because any such move could trigger a cascading catalytic effect.

When Robert Fisk reported in the Independent last week that 'Gulf Arabs' had teamed up with China, France and Japan to stop using the dollar for oil trading, there was a receptive flutter in the markets, and the greenback fell.

The report claimed that these countries aimed to create a new basket of currencies for pricing oil, which would include the yen, the yuan, the euro, gold and the new unified currency that is being planned by the Arab member states in the Gulf Co-operation Council.

Fisk's article touched a nerve: Even though the story was widely denied, it echoed the frustration both about oil pricing in dollars and about general dollar vulnerability.

Lawrence Summers, director of the White House's National Economic Council, responded by supporting Secretary of the Treasury Timothy Geithner's strong-dollar mantra. 'He made it very clear that our commitment is to a strong dollar based on strong fundamentals,' Summers said.

Oil pricing is a special case. Buying oil in dollars has been a foundation of the US currency's role as the global reserve, and the strong dollar meant that oil prices remained low. Now the reverse is happening, and a weak dollar is helping to push up the price of oil and add to the frustrations of oil producers.

The general perception is that the US needs a weaker dollar to help to rebalance its own economy. The weaker dollar should encourage exports and discourage imports and thus reduce the trade and current account deficits to lessen the country's external borrowing needs. But this should not be pushed too far.

What is discouraging today is the narrow nationalistic view almost all financial so-called leaders are taking. It is hard to imagine any of the Group of Seven or Group of 20 finance ministers leading us out of this mess.

Geithner and Summers got a lot of the blame, much of it deserved. They are too close to Wall Street bankers for the good of the US economy, let alone for a plan to save the world.

Why blame Americans alone, except that they have long taken pride in being 'the leaders of the free world' and keepers of the global reserve currency?

Last week's sad lesson is the story of a new currency for pricing oil should have focused great financial and political minds on a constructive and practical solution, but it merely seems to have panicked markets.