Is U.S. dollar losing its currency?
By MARIAN STINSON and JOHN SAUNDERS
00:05 EST Saturday, May 04, 2002
The U.S. dollar, the most successful brand name in monetary history, lost yet more ground to other brands yesterday, raising questions about whether it has traded on its name too long.
It hit six-month lows against some its major competitors, notably the euro, which could someday challenge it as a world currency. This time it did not take its Canadian counterpart down with it.
In Chicago, economist Paul Kasriel noted that the dollar's popularity has allowed the United States to import and consume more than it makes and exports, and to run up almost immeasurable external debts.
"The rest of the world advances the U.S. more than $1-billion [U.S.] a day and has been doing so for some time now, and perhaps it is looking at the return that it's been getting on those advanced funds," he said an interview.
Mr. Kasriel, senior vice-president and director of economic research at Northern Trust Co., said at least two things appear to be happening. Sagging corporate profits and low short-term interest rates suggest the United States is becoming a less attractive place to invest.
Also, hints of coming U.S. inflation and a relaxed attitude at the central bank in the United States suggest that foreigners holding U.S.-dollar investments risk being repaid in diluted money.
"In some senses, the U.S. is like a banker to the world. In the past several years, the rest of the world has felt very comfortable placing its funds in this U.S. bank, and banking of course is an industry that depends very much on confidence. You have to have confidence that the institution in which you're placing your funds is going to use them prudently."
There is always a danger of a run on the bank, he said, although the United States is blessed in a way that financially crippled Argentina, for example, is not.
"Argentina had a lot of debt denominated in dollars — not nearly as much, of course, as we do, but nevertheless a lot of debt. Not the only difference, but one difference,between the U.S. and Argentina is that the U.S. can print those dollars. Argentina could not."
The immediate news yesterday was that the U.S. unemployment rate reached a 7½-year high in April, suggesting that the economic recovery will be slower than was hoped, a development that would not help to keep foreign capital pouring in.
The dollar fell more than a full yen against the Japanese currency, hitting ¥126.85 at its low of the day. The euro climbed to 91.73 cents (U.S.), its high for the year to date, while the Canadian dollar, up about a full U.S. cent since the Bank of Canada's quarter-percentage-point interest rate hike last month, held steady at 63.98 cents, up 0.01 from Thursday.
"In the past, when the U.S. dollar gets hit against other currencies, Canada also takes a hit and depreciates against the U.S. because it's seen as a North American currency," said Marc Lévesque, senior economist at Toronto-Dominion Bank. "This time, it's showing it has legs of its own."
BMO Nesbitt Burns senior economist Douglas Porter was bold enough to predict a 65-cent loonie by the end of the year, citing such factors as Canada's economic growth, government surpluses, improving commodity prices and rising interest rates. "All the stars are in rare alignment for the beleaguered Canadian dollar," he said.
For the United States, the big question is whether foreigners will forever want to own vast numbers of dollars, both in the form of stocks, bonds, factories and real estate in the United States and the form of crumpled greenbacks in mattresses, fruit jars and black-market cash boxes everywhere else. One day, they may decide they own too many. Nobody knows how far the dollar would fall then.
"The day of reckoning is certainly coming," said Louis Crandall, chief economist at Wrightson Associates LLC, a New York bond market research firm. "Like a lot of other people, I've been looking for it for quite some time."
But today is not the day, he continued.
"The thing that .5.5. has driven the dollar up over the past few years is the prospects for productivity growth and economic growth in the U.S. relative to other nations, and looking ahead at the next 12 months you've got to say the outlook favours the U.S. again, at least relative to the European currencies, which makes this an odd time for the dollar to be weakening."
The euro "may have a little way to run," Mr. Crandall said, but prospects are still good for long-term capital flows to the United States.
With files from Dow Jones, Reuters, AP and Bloomberg |
