Value of dollar withers amid growing doubts

Investors clamour to buy pretty much anything these days as long as it was not the dollar. A seven-month slide in the value of the dollar gained force as investors migrated to other markets and fretted over a report that crude oil could one day be priced in other currencies, hobbling the dollar’s role as a vehicle for global trade.

On Wall Street, shares climbed on hopes of robust profit reports as earnings season unofficially began.  And the dollar’s decline propelled gold prices to record highs above $1,040 an ounce and touched off a buying spree for copper, silver, platinum and crude oil — commodities that typically hold their value if the dollar does not.

The dollar slipped further against major currencies, continuing a decline that has sent it tumbling 15 per cent since early March 2009. The dollar fell to $1.47 against the euro, and the Japanese yen strengthened to 88.83 for every dollar. Investors who sought the relative safety of the American currency during the financial crisis are now pursuing higher returns in stocks, commodities and foreign currencies, out of concern that demand for American debt is waning, and that the dollar may lose its status as the world’s reserve currency.

Underlying the dollar’s weakness is the growing perception that many policy makers around the world, and in Washington, may welcome a slow but sustained depreciation of the dollar, especially against the Chinese renminbi and other Asian currencies. A weaker dollar would make imported goods more expensive in the United States and American exports more competitive, but it could make overseas investors wary of buying the Treasury bonds that the country needs to sell to finance its deficit. The slide gained momentum after the Reserve Bank of Australia surprised investors by raising interest rates, making Australia the first big economy to lift rates after the global financial crisis.

Countries around the world — including the United States — trimmed interest rates to record lows as the credit crisis metastasised last year, in an emergency effort to stimulate the markets and keep lending from drying up. Although credit is flowing better now, the Federal Reserve has indicated that interest rates will hover near zero for some time.

“The move was taken as a sign that the global economy is firmly on the road to recovery,” said Vassili Serebriakov, a currency strategist at Wells Fargo. “That’s lifted risk appetites and assets across the world. The dollar strengthened when global financial markets went into a tailspin and has retraced back all that strength.”
Adding to the turmoil, a report in The Independent, a British newspaper, suggested that China, France, Japan and Russia were in secret talks with Persian Gulf countries to abandon the dollar for international trade in oil and replace it with a basket of currencies and gold. The article named no sources and was quickly denied by Muhammad al-Jasser, the Governor of the Saudi central bank, and Dmitry Pankin, Russia’s Deputy Finance Minister. French officials declined to comment. In China,well-connected bankers were sceptical.

“While informal discussions might have taken place, I doubt they represent a serious intent to undermine the existing global monetary order or the role of the US dollar,” said Fred Hu, who is the Chairman of greater China for Goldman Sachs and advises the Chinese government.

But the report caught the attention of investors because several economists had been predicting that at some point, the world’s oil exporters would start moving toward other currencies to limit exposure to the dollar.

“It won’t be easy to make such a shift; it’s a pretty unrealistic idea in the near term,” said Qu Hongbin, an HSBC economist in Hong Kong. But in the years to come, he added, China would be delighted if it could print its own currency to pay for oil, instead of having to earn dollars through exports.

Any shift away from the dollar for oil trading, or for commodities more broadly, would seriously undermine global demand for dollars and strengthen the alternatives to it. This would make it harder for Washington to borrow overseas to finance its budget and trade deficits, and could fuel inflation in the United States.

Analysts characterised the surge in commodities prices as a reaction to weakness in the dollar, rather than a sign of bullish hopes for a quick recovery. Although activity is picking up, oil consumption remains subdued as factories work at part capacity, and consumers are still reluctant to spend thousands of dollars on gold jewellry when the recovery is tenuous. Crude oil futures in New York rose 43 cents, to $70.83 a barrel, and gold futures rose $21.90, to $1,039.70.

Despite worries about the eclipse of the dollar and an estimated $1.6 trillion deficit in 2009, the United States is still finding many eager buyers in the debt market. Foreign governments have billions of dollars in their coffers, and demand for Treasury notes has risen since May, making it cheaper for the government to finance its own operations.