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UPFRONT: As the dollar loses its charm, the world frets

WASHINGTON – IN CHARLIE Wilson’s War, a new movie based on a true story and starring Tom Hanks, a Texan congressman convinces the United States administration to back a plan to oust the Soviets from Afghanistan.

It involves ‘greening’ Afghanistan – pumping a billion dollars a year to arm the Afghan mujahideen. The plan works, but in a questionable triumph for American diplomacy that eventually emboldens the Taleban.

Three decades later, the greenback has not gone places either.

Reflecting the weaknesses in the US economy, it has lost considerable value against major currencies and, for the first time in nearly a century, appears to have a rival in the euro.

Over the past five years, the dollar has tumbled by more than 25 per cent against currencies of America’s trading partners. Its decline has been especially sharp against the euro – a drop of 40 per cent in the same period.

At least three other facts point to its ebbing charm.

One, the value of euro notes in circulation has exceeded the value of dollar bills.

Two, the dollar has been eclipsed by the euro as the main denomination of international debt issues.

Three, the proportion of the world’s foreign currency reserves held in dollars has shrunk to 64 per cent, down from 70 per cent in 1999, when the euro was launched. In the same period, the portion held in euros rose from 18 per cent to 26 per cent. The falling dollar is reshaping the globe’s commerce, trade and economics.

One example is the twist in the high-profile rivalry between aircraft makers Boeing and Airbus.

The dive in the dollar gave US-based Boeing an advantage over France-based Airbus, which sells planes at prices denominated in dollars but has to pay about 50 per cent of its costs in euros. It loses a billion euros in profit every time the euro gains 10 cents against the dollar.

The situation is ‘life-threatening’, to quote Airbus chief executive Tom Enders. It convinced him of the need to take some assembly lines across the Atlantic, to Wichita, Kansas and Mobile, Alabama.

Luxury carmaker Rolls-Royce is transplanting some factory works from Liverpool in Britain to Ohio because of similar considerations.

Exporters across Europe, as well as in Asia, Australia and Africa, are hurting as they earn weaker dollars and foot production costs in dearer home currencies.

The dollar does not go the same distance in India any more. Visitors to the Taj Mahal find they cannot pull out the dollar to pay for tickets, while software companies have found their fortunes evaporating.

Even as their exports in dollar terms stayed the same, they shrank when converted into Indian rupees.

Oil exporters were another group of nations hit by the falling dollar. They reaped a bounty from spiking oil prices but were spooked by the inflation that followed. In a trail-blazing move, Kuwait ditched the dollar peg last May to contain inflation.

Iranian President Mahmoud Ahmadinejad, railing against the fact that oil prices are quoted in sliding US dollars, fumed: ‘They get our oil and give us a worthless piece of paper.’

But not everybody lost. Vietnam, which clung closely to dollar parity, found it gained investors at the expense of Thailand, where the rising baht made operations costlier.

Sovereign wealth funds, sitting on billions of dollars generated by trade surpluses and oil revenues, factored in the falling dollar when they made headline-grabbing investments last year, such as the Abu Dhabi fund buying a US$7.5 billion (S$ 10.7 billion) stake into Citibank, and Singapore’s GIC investing US$10 billion in UBS.

Mr Gary Hufbauer, of the influential Washington DC-based think-tank Petersen Institute for International Economics, explained the logic behind the moves: ‘They know very well that, over the next five years, the dollar is likely to decline against other currencies.

‘But a big move out of dollars is likely to precipitate the decline that will, in turn, undermine the value of their remaining dollar holdings.

‘They also know that, over a period of five or 10 years, dollar assets have had better returns than yen or euro assets. So they conclude that one sensible way to hedge is to put part of their dollar hoard into equities, corporate bonds, and other dollar assets.’

But while the rest of the world mostly fretted over the dollar’s fall, it could be just what the doctor ordered for Uncle Sam.

The world’s largest economy, bracing for a recession, is finding a salve in the sudden surge in exports – helped by the cheaper dollar, which has made American products competitive.

‘Businesses are getting behind exports, and we are becoming a major, major exporter,’ said US Commerce Secretary Carlos Gutierrez recently.

Exports grew at an annualised rate of 18.9 per cent in the third quarter of 2007, the fastest rate since 2003.

Exports now make up 11.5 per cent of the US economy’s total output. Five years ago, they made up 9.4 per cent of the gross domestic product.

Some analysts expect the gains from exports to offset the housing slump. The gains will also help the US hack away at its mammoth current account deficit – which measures its trade and financial dealings with the rest of the world and reflects the excess of imports over exports.

‘The re-balancing process has begun,’ says Ms Tu Packard of Moody’s economy.com. She feels the US dollar is ‘as weak as it can be’, and is likely to see a rebound next year.

And finally, the falling dollar could help head off protectionist sentiment in the US. Calls by some congressmen to levy penalties against exports from China are likely to fade as US exports there keep on growing.


Source: The Straits Times 9 Jan 08


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