November 26, 2004 08:33 AM
No Longer Top Dollar?
Excerpt: There is little U.S. appetite to defend the dollar while the domestic effects of devaluation remain benign. But this insouciance won't last if the decline turns into a rout that threatens runaway inflation, higher interest rates and a recession. Sooner or later, the world's governments will have to come together as they did at the time of the 1985 Plaza Accord to manage the dollar devaluation. But we haven't reached that point yet.
It is a mark of how low the U.S. dollar has fallen both in the markets and in the world's estimation that there is serious talk of the greenback being eclipsed by the euro as the global reserve currency.
The eurozone is barely growing, many of its member states are deeply in debt, and it lacks credible political authority. Yet the Russian government says it is considering switching a proportion of its reserves from dollars to euros in a move that, if widely copied, would cause turmoil in the currency markets.
The Russian announcement reflects a worldwide loss of confidence in America's willingness to tackle its ballooning twin deficits. It follows a warning by Li Ruogu, the deputy governor of the People's Bank of China, that the U.S. should put its own economic house in order and stop blaming others for its structural problems.
"China's custom is that we never blame others for our own problem," Li told the Financial Times. "For the past 26 years, we never put pressure or problems on to the world. The U.S. has the reverse attitude; whenever they have a problem, they blame others."
Demanding that China revalue the yuan, Li said, was not the way to narrow the U.S. trade deficit, now 6 percent of its gross domestic product.
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