The rumblings of the dollar’s decline are louder than usual at the moment, tied to speculation that oil producing countries are seeking to move to a basket of currencies in oil pricing, rather than using the dollar alone. There are genuine developments behind such rumblings, mostly concerning American economic policy. But there are also reasons to believe the dollar has staying power, especially if U.S. errors can be fixed.
If Arab and other oil producers are indeed looking to move away from the dollar, they have cause. The Federal Reserve has been too free and easy for years, pumping too many dollars into the world economy. Like anything else, too many dollars means each one is worth less.
Looking down the road, deficit spending is set to make matters worse. Unnecessary deficits under the Bush Administration have given way to colossal deficits under the Obama administration, plus a free-for-all Congress that seems to be in charge of economic policy. When a government can’t control itself, its economic partners deduce they can’t trust the value of that country’s currency.
There’s still time, though, for the U.S. to bolster the dollar, both to preserve our international leadership and because the global use of the dollar is an economic advantage to our people and our country. Strangely enough, a major friend of dollar can be found across the Pacific, in China.
Notwithstanding the constant talk of the PRC’s rise, Chinese actions overwhelmingly serve to support the dollar. The RMB, a dollar alternative according to some, is as tightly pegged to the dollar as the Bahraini dinar. In their $2.1 trillion worth of reserves, the Chinese hold approximately three times as many dollars as all other currencies combined.
The Chinese weight on the dollar is even bigger than the hefty overall global weight. Twenty years ago, the IMF put the share of dollar at a bit over half of global foreign exchange reserves. At the end of June 2009, the level was closer to two-thirds.
So the dollar is still the world’s currency and will be for some time. To dispel the possibility of its decline, the U.S. needs better economic policy at home. A good start would be leadership and discipline in the Obama Administration’s next federal budget, two qualities that have been conspicuously absent to now.