Friday, December 01, 2006

U.S. dollar ahead in global currency limbo...

Globe and Mail: “Struggling U.S. dollar triggers currency concerns”

FOX News: “Dollar Continues Swoon After Weak Economic Data”

It’s not a game any currency wants to be winning, but the United States dollar appears to be showing the world “how low it can go.” The dollar is currently at a 14-year low against the British pound and a 20-month low against the euro.

The Institute for Supply Management (ISM) released its survey of national manufacturing interests in the U.S., confirming a continued slowdown in the U.S. economy. Analysts reported that European currency is an increasingly attractive investment these days and that the prevailing mentality is not only to avoid buying dollars, but to sell.

Reports also indicate that China, an increasingly powerful player in global financial markets, may have played a role in the recent and sudden weakness of the dollar by indicating last week that it may begin liquidating its $1 trillion investment in U.S. dollars based on fears that holding so many dollars—China is the single biggest investor in U.S. currency—is not a “winning” investment strategy. In anticipation of such a move by China, Russia, Middle Eastern nations and other investors in the dollar have already announced plans to cut their holdings of the currency.

While China has yet to act or announce plans to liquidate dollar holdings, the possibility and its potential repercussions have made investors nervous. One outcome looming should China follow through on a dollar-dumping strategy: The dollar will plummet, as will the Chinese yuan, which is still “pegged” to the dollar. Other currencies (e.g., the euro, pound, yen) will rise accordingly. Some analysts fear that in the long-term this situation could lead to “trade chaos.”

The lead player in this problem is the United States, a wealthy, developed country that appears to be having fiscal problems resulting in drops on currency value that are further exacerbated by concerns about the wisdom of continued investment in the currency.

While institutions like the International Monetary Fund (IMF) traditionally provide aid and advice to developing countries, it is arguable that the U.S. is—or will be at some point in the not-so-distant-future--in need of fiscal policy advice to resurrect and/or stabilize the dollar.

Are the IMF and World Bank capable of addressing and/or responding to global trade and monetary issues that find their source in a developed country?

How amenable would the United States be to accepting advice regarding fiscal policy from the IMF and/or World Bank?

Does the United States already exercise too much control over these institutions—politically and financially—to be able to benefit from the expertise they provide to less entangled nations?

Given the effect that financial destabilization of the U.S. would have on global trade, what role should other nations--or international organizations--play in ensuring that the current situation does not grow worse, escalating into long-term "trade chaos"?

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