Once respected as dependable and durable, the greenback is fast becoming the incredible shrinking dollar.
The US government's official 'strong-dollar policy' sits uncomfortably with its 30 per cent fall in value against major currencies since 2002. So just why are we getting less bang for buck, the pegged Hong Kong dollar included?
Blame for the dollar's malaise is falling increasingly at the door of the ballooning trade deficit the US runs with the rest of the world. In fact, Federal Reserve chairman Alan Greenspan recently said as much, noting 'at some point' it could lead foreigner investors to diversify into other assets.
Some alarming statistics are also sending up red flags. America's appetite for foreign goods now outstrips its exports to the extent the US must import US$2.6 billion in cash every working day. The trade deficit is expected to reach US$655 billion this year. America might be living beyond its means, yet arguably this is a privilege that comes from owning the world's de facto reserve currency. This works in two ways. First it ensures demand as the primary currency of exchange for internationally tradeable commodities such as oil, and secondly, as the primary reserve asset held by foreign central banks.
This has allowed the US to forgo the belt-tightening that such deficit binges would force on smaller nations. But recent falls in the dollar indicate investors believe the US has taken one liberty too many. China and Japan have amassed reserves of US$515 billion and US$720 billion, respectively. This year, however, even central bank purchases seemed less resolute - some may have already reached the threshold described by Mr Greenspan.
There is also recognition that the US is happier with a weaker currency. Not only are American exports made cheaper, imports become costlier, helping to deflate the deficit. Limited progress made so far means further currency deprecation may be needed. Hence, the US repeatedly requests China re-pegs the yuan at a lower level to the dollar.