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"Dollar murdered. Drowned in red ink. Clues point to the White House." So might a tabloid headline read as the angry mourners gathered to affix blame for the end of the era in which the dollar served as the currency in which the world does business -- its reserve currency, to use the economists' jargon. But if such a funeral ever takes place, the mourners should remember that right now they aren't too happy with the existing system.
The Chinese are cross because the falling dollar means the stacks of US IOUs they have in their vaults will be paid back in a devalued currency. The Americans are cross because the Chinese refusal to allow the renminbi to rise in value meant goods made in Chinese factories will continue to displace made-in-America products, and provide jobs for Chinese rather than American workers. The Europeans are cross because the strong euro threatens to abort the export growth on which they are depending to fuel their economic recovery. The British are cross because the weak pound is causing sticker shock when they travel abroad, and suggests that a spurt of inflation is just around the corner. In short, everyone seems to be terribly unhappy with developments in the currency markets when the dollar was king. Well, not terribly.
The Chinese might be unhappy that the dollar is declining in value, but are delighted that their policy of pegging the renminbi to the dollar is keeping their export machine humming -- they need millions of new jobs to prevent their still-poor masses from wondering whether some other form of political organization might provide a better life. The Americans might be fearful that further declines in the dollar will dethrone it as the world's reserve currency, but the Obama administration, talking the talk of dollar strength but walking the walk of dollar weakness, is hoping that a cheap dollar will make imports more expensive and exports more competitive, creating jobs by the time the 2012 presidential election rolls around. European exporters might be groaning about the growth-stifling effect of their high-flying currency (although German manufacturers seem to be doing just fine), but eurocrats are secretly delighted that the euro is proving a source of strength in these difficult times for members of euroland, and preventing inflation from taking hold.
Other players are also trying to cope with the falling dollar. Brazil has tried to stem the rise of its currency, which has appreciated over 40% against the dollar since March. To no avail. Oil and other commodity producers are raising prices to make up for the declining value of each dollar they receive by earning more of them. But these are minor players compared with the geopolitical players who see an opportunity to replace the dollar as the currency in which the world does business, to cut the US down to size -- think China, Russia, Venezuela, Iran.
It is one thing to want to replace the dollar, quite another to find a suitable substitute. The renminbi can't be the chosen currency so long as it is pegged to the dollar, for its value will move with the dollar. The ruble is not a candidate, since there is not enough of the currency around to handle the volume of world trade and, besides, it is not the sort of money on which you can rely to hold its value, especially if oil prices collapse. Which brings us to the euro.
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