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The uncertain future of the U.S. dollar as the world's reserve currency is bound to be a top item on the agenda when world leaders meet here for the Group of Twenty summit.
The dollar's No. 1 status has been a symbol of the United State's position in the global community as the predominate driver of world commerce. But the venerable greenback is facing its most serious challenge yet because of our collapsed consumer economy.
"We've seen a complete reverse of the trend of borrowing to keep up consumer spending and financing purchases through mortgages and credit cards and student loans," said Addison Wiggin, executive publisher of Agora Financial, a financial research firm in Baltimore, Md.
"Most of our spending is financed through the credit market, which is heavily dependent on our ability to attract capital from the rest of the world," Mr. Wiggin said.
But changing perceptions are chipping away at the dollar's cherished status as the currency to the world.
As recently as July at the G-8 Summit held in Italy, members of the BRIC nations (Brazil, Russia, India and China) made a call to remove the U.S. dollar as the world's reserve currency and create an alternative currency as a way for the world to wean itself off its dependence on the United States.
China, Russia and Brazil earlier this month took a major step in shifting away from dollar reserves when they sealed a deal with the International Monetary Fund to buy $70 billion worth of currency-diverse bonds that are a mixture of euros, pounds, yens and U.S. dollars that can be used in international trade.
China bought $50 billion of these bonds while Russia and Brazil bought $10 billion each.
For these countries, the move is a small step away from their reliance on the dollar. While the chances of a full-blown shift happening anytime soon is unlikely, the issue is certain to be a part of the G-20 discussion.
"Most countries don't look at the BRIC nations as ones that should be able to push that sort of an agenda because they don't have the status," said Chuck Butler, president of world markets at EverBank in St. Louis.
"To me, these countries will have to be reckoned with for two reasons," Mr. Butler said. "First, they have large sums of cash reserves and they have a very large portion of the world's population."
Mr. Butler still believes we are decades away from any change in the reserve currency status.
"These are baby steps," he said. "This is not something that will happen next year. These countries are throwing the idea out there to try to get people to understand the need to replace the dollar as the reserve currency."
Foreign central banks that are heavily invested in U.S. treasuries are growing leery of the American government's nonstop deficit spending. The fear is that the U.S. government will get so deep over its head it will not be able to repay its debt. Foreign governments also are fearful of selling their dollar denominated assets to limit their exposure because that would cause the prices of their remaining dollar assets to fall.
"In the near term, the dollar will retain its pre-eminent position among world currencies," said Robert Dye, an economist for PNC Financial Services in Pittsburgh. "But over the long run, other currencies will become increasingly important, particularly the Chinese yuan as China overtakes Japan as the world's second largest economy.
"It's a tremendously difficult subject because these are historic times. Things are changing politically and economically," he said.
As frustrated as other nations might be with the increasing U.S. national debt, there is no other currency strong enough to replace it.
The U.S. dollar is used in trade all around the world. If the dollar were replaced, foreign governments would not need U.S. dollars to do business and its value would sink. The United States would lose its ability to borrow its way to prosperity and out of depression at will.
"The fact that the dollar has been the reserve currency of the world has allowed us to live beyond our means for a long enough period of time to get into trouble and that's what the crisis is," Mr. Wiggin said. "The deficit spending in Washington is the biggest threat to the dollar's status as the reserve currency."
The value of the U.S. dollar has been on a downward trend.
The U.S. Dollar Index, which measures the fluctuating value of the dollar against other currencies, was created in the 1970s. Since its inception, the dollar's value has risen as high as 160 and fallen as low as 71 at its weakest point about a year ago.
It currently hovers around 80.
While the average person might not be too concerned about the constant rising and falling of the U.S. dollar against other world currencies, many consumers may be surprised to know the dramatic effect it has on their bottom lines.
From the cost of food and gasoline to the interest rates they pay on cars and home loans, consumers and companies will either pay more or save based on how the value of the falling dollar affects their businesses and daily lives.
If central banks around the world decided to stop buying U.S. debt and begin accumulating other currencies to store their wealth, it would plunge the value of the dollar and destroy the purchasing power of U.S. citizens.
"The other thing that will probably be discussed at the G-20 summit is the size of the deficit spending in the U.S.," Mr. Butler said. "The U.S. has to listen because we are dependent on foreigners to buy our treasuries.
"If we turn our noses up and say it's their problem, it will become our problem."
First Published September 22, 2009 12:00 am
