The Meaning of a Dropping Dollar
And why you should never take a taxi from Heathrow into central London
Monday, Nov. 22, 2004
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Even Americans who never leave their shores may have started to hear about some puzzling consequences of the dollar's decline. China's sidewalk banks—illegal but tolerated money changers—are doing a land-office business swapping dollars for renminbi (RMB), the Chinese currency, because canny Chinese now think that the RMB is a "safer" currency than the greenback. They are making the same "one-way bet" as currency traders all over the world, who calculate that the only way in which the record U.S. trade deficit can be brought under control is if the dollar declines, hence making American exports relatively cheaper in foreign markets and, say, Chinese imports relatively more expensive at your local Wal-Mart.
But currency markets have a historical tendency to overshoot, and if they did so now, even stay-at-home Americans would feel the pain. In the markets, where the euro ended last week at $1.30, there is a sense that the greenback still has plenty of room to fall. Those fears were exacerbated last Friday when Federal Reserve Chairman Alan Greenspan said that international investors would "eventually adjust their accumulation of dollar assets"—which means sell them—or "seek higher dollar returns"—which means that U.S. interest rates might soar. Rising interest rates could lead to loan defaults and a reduction in consumer spending, which could easily plunge the U.S. into a recession.
Meanwhile, spend a moment thinking of those Chinese sidewalk banks. The RMB is pegged to the dollar, which means that when the dollar declines, so does the Chinese currency. The U.S. authorities say this is unfair, because it means that Chinese goods continue to be relatively cheap in American stores, which contributes to the U.S.'s massive trade deficit with Beijing (although China's global-trading account is roughly in balance). So at every opportunity (most recently at last weekend's Asia-Pacific Economic Cooperation summit in Santiago, Chile), U.S. officials take the chance to jawbone the Chinese into letting the RMB appreciate in value.
The RMB may well appreciate, a little, over the next year. But the Chinese have made it very clear that they will take their own sweet time about when to let the currency rise and by how much. So although Americans who don't travel haven't noticed it yet, here's one way in which the dollar's decline really has changed the world: today the U.S. Administration is a supplicant to Beijing. Oh, and by 2008, Shanghai plans to have the tallest building on the planet. That's bragging rights to China, twice over. Get used to it.
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