Currency Currents

Traders Talking 'Chimerica'

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Let's see what they're worth.
  • Why it matters

    Why it matters

    The United States has long had a privileged position with the dollar serving as the world’s reserve currency. Any change to this dynamic would have major ramifications for the global economy.

  • Facts

    Facts

    • Many economists believe a euro will soon be worth less than a dollar.
    • The share of dollars as the world currency reserve has dropped to 60 percent in recent years.
    • Fixation on the U.S.-China economic relationship overlooks the European Union’s position as global leader in production capacity, the writer says.
  • Audio

    Audio

  • Pdf

The United States is undergoing an economic renaissance. Through the massive use of fracking, the country is no longer dependent on oil imports, and its economic recovery is gaining steam. While the Federal Reserve has announced its exit from quantitative easing and low interest rates, the fear of a euro crisis is rising in Europe. No wonder the dollar – among other currencies – is appreciating against the euro, although not as strongly as the media suggests.

It seems premature to speak of a fundamental recovery of the dollar, even if many economists believe a euro will soon be worth less than a dollar. Their euro-skepticism seems confirmed because Mario Draghi, the president of the European Central Bank, is doing everything to talk down the euro– even at the risk of a currency war. Furthermore, he believes it is necessary to buy time for France and Italy’s governments, which are hardly reformist.

Economists and journalists should be restrained with predictions of the dollar’s sustainable comeback by being mindful of British writer Horace Walpole’s recommendation: Wise prophets wait and see what happens. The truth is the United States’ position in the global economy is seen as in decline, despite Wall Street, fracking and Silicon Valley.

At the end of the 19th century, the U.S. economy became the world’s largest, based on production capacity. Until then, China was king. The dynamic development in the United States has since dictated the pace of the global economy, and its military dominance allowed the nation to become the world’s police force. When the eastern bloc fell in the early 1990s, the country was economically and militarily the master of the universe.

It seems premature to speak of a fundamental recovery of the dollar, even if many economists believe a euro will soon be worth less than a dollar.

In 2000, almost 31 percent of production worldwide was created in the United States and over 70 percent of world currency reserves consisted of dollars. But for some time now, both military and economic supremacy have been eroding. The share of dollars as the world’s currency reserve has sunk to 60 percent.

In the past year, the share of worldwide total production was at 22.4 percent for the United States, 12.7 percent for China and 23.4 percent for the European Union, according to the International Monetary Fund. If one follows the IMF, the Chinese economy could be the global production leader in 10 years, despite the slowing growth.

Doubtless, the dollar will remain the world’s most important currency in 2024. However, it is just as certain the political leadership in China will do all it can to make the renminbi convertible and establish it as a world currency in order to be able to pay for deliveries from abroad with its own money.

Moreover, the fixation on the United States and China as the global economic centers of gravity overlooks the fact that the European Union – as measured by production capacity – is the world’s greatest economic area. The European community, despite the current crisis, has a lower national debt ratio than the United States.

If some European governments let the euro die out of fear of reforms, they would be condemning the continent to economic insignificance.

For Europe, a breakup of the euro zone and a return to national currencies would be an economic disaster. It would result in the bipolarity of currency policy, controlled by the dollar and renminbi, a “Chimerica.” That would not be in the interest of Europe and certainly not of Germany, the country with the most productive industrial sector worldwide.

The European Union’s geopolitical significance is as undeniable as the euro’s global economic significance. If some European governments let the euro die out of fear of reforms, they would be condemning the continent to economic insignificance. The probability that Europe will emerge stronger from the current crisis is clearly greater than the risk of a breakup of the monetary union.

Therefore, in the short- to medium-term, it should be reckoned less that the dollar will continue to soar but rather that its function as the world currency will come under pressure from the renminbi and euro. Especially since signs exist that the fracking boom and reindustrialization could be short-lived.

To reach the author: ruerup@handelsblatt-research.com.

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