Global Economy Why the Dollar's Fall is Bad for Everyone

As the United States pushes further and further into debt, the country is financing its budget with infusions of a billion dollars a day from Asia. But if China and Japan started trading in euros instead, the dollar could collapse. That would be bad for the US and Germany, where economic recovery is dependent on exports.


If America's Asian creditors decided to abandon the dollar in favor of the euro, the implications for the global economy could be grave.
SPIEGEL ONLINE

If America's Asian creditors decided to abandon the dollar in favor of the euro, the implications for the global economy could be grave.

The logo on one of the classic T-shirts on display in the souvenir shop at the Chicago Futures Exchange reads: "Pigs are trendier than you thought." For generations, the Exchange's building on Wacker Drive has been famous for trading in pork bellies.

These days, of course, a different commodity has become the focus of speculation: On the floor of the exchange, currency traders, in their brightly colored jackets, are betting billions on the future of the US dollar. And if the traders' predictions hold true, it's not exactly rosy.

The futures traders, in any event, seem to agree: They're betting that the greenback will continue to decline. To show that they mean business, they've covered themselves with at least 200,000 so-called short contracts, which entitle them to sell currency at a set exchange rate on a fixed date in the future.

The volume of selling positions has quadrupled since spring. Recently, in early November, trading volume jumped by 17 percent in one week alone. Into the euro and out of the dollar -- that's the traders' current mantra.

The US currency has dropped into a downright tailspin, rapidly losing its value, and not just in recent weeks. Since February 2002, the dollar has declined by 30 percent, while the value of the euro has increased proportionately. Back then, investors were getting $0.86 for one euro. This week, the euro jumped over the $1.30 mark, an all-time high. "We are experiencing a weak dollar across the board," says Stephan Beilke, a currency trader with Bremer Landesbank. He is firmly convinced that this trend will continue.

The economists are outdoing each other with bleak forecasts. Thomas Mayer, chief European economist at Deutsche Bank, believes $1.40 is realistic, while his counterpart at investment bank Goldman Sachs, Jim O'Neill, expects an exchange rate of $1.50. Finally, US economist Fred Bergsten is boldly talking about rates of $1.80 and $2.20. Everything seems possible.

Bush II: four more years of debt?

It seems odd: A US president is re-elected by a larger margin than expected, normally a sign of confidence and strength, but then the currency begins taking a nosedive. Some people are just now realizing that the election slogan "Four More Years" could also mean four more years of more debt, more unemployment and more uncertainty.

People are beginning to worry that the consequences of the dollar's weakness could be more serious than anticipated. In the United States, a strong currency is the basis for relatively low interest rates and healthy consumption rates. In Asia and Europe, it's an important condition for a flourishing export economy.

Germany's economic recovery, in particular, is completely dependent on exports. The German economy was almost stagnant in the third quarter, because exports haven't been as strong as they used to be. Carmakers and chemical conglomerates are worried that they could be selling fewer and fewer products in US dollar markets in the future. Customers in those markets are seeing these products become more expensive as the euro strengthens.

The Chicago Futures Exchange: Hedge funds pump billions into the market and drive prices in the desired direction.
REUTERS

The Chicago Futures Exchange: Hedge funds pump billions into the market and drive prices in the desired direction.

Of course, most German companies have learned their lesson and are now hedging their dollar revenues against exchange rate risks. But this also has its price. "The longer the hedge transactions continue and the more the dollar fluctuates, the more expensive the whole thing becomes," says Diether Klingelnberg, senior manager at a mechanical engineering firm in Germany's Rhineland region. "If the euro reaches 1.50 or even 1.80, it'll become unaffordable."

Growing wary of the dollar

The anti-dollar mood is also being stoked by speculators. Hedge fund managers, who are some of the most aggressive investors, periodically pump billions into the market for a few days, just to push exchange rates in the desired direction. So what happens if they permanently turn against the dollar?

Hardly anyone expects George W. Bush to spend his second term enthusiastically addressing the country's economic problems: the US budget and current account deficits. Caio Koch-Weser, an undersecretary in the German Ministry of Finance, warns that this double deficit is "alarming the markets." As long as it exists, the dollar will not regain its strength.

The US budget deficit for the last fiscal year will reach a record $422 billion. The war in Iraq is consuming enormous sums of money, and tax cuts are also taking their toll.

At the same time, the current account deficit is growing: Americans are buying more than they produce, and they're using credit to pay for their affluence. The deficit had already reached $531 billion in 2003 and is expected to grown by another $120 billion this year. The government can't borrow from its citizens, who are saving at a rate of only 0.2 percent. As a result, it's forced to borrow overseas, mainly in Japan and China.

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