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For the dollar, a 'crisis' is relative

The greenback has been in decline for a decade, but the latest slide is setting off alarms. Still, a collapse seems unlikely given the lack of a real global alternative to the dollar's status.

April 23, 2011|TOM PETRUNO

Russia might like the higher prices it gets for its oil exports, but it also fears the surge in prices will lead to a bust.

Global investors have another dollar-related incentive to pile into commodities: If they expect that the U.S. won't rein in its record budget deficits and that Treasury borrowing will continue to mushroom, hard assets become a potential hedge against U.S. fiscal calamity that could drive interest rates sky high.

The dollar's further descent this week followed credit-rating firm Standard & Poor's warning Monday that the U.S. could lose its AAA debt rating in the next two years if the deficits aren't pared.

Could S&P's threat be enough to spark a genuine dollar crisis?

Barry Eichengreen, a UC Berkeley economics professor, chronicled the dollar's history in his book, "Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System," published this year. Although he believes that the dollar is in a long-term decline, he said he doubted that we're headed for a currency meltdown in the near term.

There's a practical barrier to a sudden collapse, Eichengreen said: "There has to be somewhere to flee to." The dollar remains preeminent as the world's primary currency, and no other paper currency has the market presence to take over for the greenback. Neither do gold or silver.

Still, he expects that the dollar's status will continue to erode over the next few years, and that both the euro and the Chinese yuan will become more viable alternatives to the U.S. currency for global investors weary of seeing their dollar holdings devalued.

If the world feels less compelled to hold dollars, one result will probably be higher interest rates if the Treasury remains on a borrowing bender. So S&P's warning about U.S. debt levels should be taken seriously in Washington, Eichengreen said. "This will hopefully concentrate the minds of the politicians."

But with the dollar already so weak, one risk in betting against it is that there may just be too many people on that side of the boat now. If real progress is made in attacking the deficits, or if the Fed were to signal that it will begin tightening monetary policy, the surprise could be how quickly the dollar could stage at least a temporary rebound.

"If there's one thing that I don't like, it's that a lot of people are bearish on the dollar," said Axel Merk, who manages the Palo Alto mutual fund Merk Hard Currency, which invests primarily in the U.S. currency's rivals.

Then again, he said, the world is bearish on the buck for plenty of good reasons.


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