Dollar's clout sinks worldwide
Updated: 2008-03-14 11:30
"Whip out dollars at the French flea market now, and they'll shoo you away," he said at his store near apartment buildings where Europeans are snapping up units because they've become dirt cheap. "Before it was like the second coming of Christ, but now they don't want it or if they do take dollars, they're going to take their pound of flesh."
The dollar has steadily eroded in value against the euro and other currencies since 2002 as US budget and trade deficits ballooned, but fears of an American recession and credit crisis have sent the dollar to stunning lows amid predictions the slump will continue for a long time.
While low dollar cycles have come and gone for decades, experts caution that it's now much more difficult to predict when this one will end because the euro didn't exist as competition for the dollar before.
During previous US economic downturns, big foreign funds typically snapped up US treasuries, helping to shore up the dollar to a certain degree. But the euro and currencies from other nations are now seen as legitimate options, and interest rates are higher outside the United States - meaning the funds can get better returns on investments elsewhere.
"You have the US still holding this trade deficit, but now you have the possibility of a US led recession, and you have a weakening currency. So it's a very dark outlook for the dollar," said Gareth Sylvester, senior currency strategist with the British firm HIFX Inc., which executed $40 billion in currency trades last year.
Nations that were once seen as incredibly risky for investments - such as Brazil - are now seen as good long-term bets. And countries such as China and Russia, with burgeoning coffers of money to invest abroad, are thought to be shifting some of their reserves or diversifying fresh income to destinations and currencies outside the United States.
It used to be important for most countries "to accumulate dollars as a precautionary element against rainy days, but the accumulation of reserves has become so large in most emerging market countries that the balance is way beyond what's needed for precautionary reasons," said Eliot Kalter, a fellow at Tufts University's Fletcher School of Law and Diplomacy and a former International Monetary Fund official.
While most experts believe the dollar will eventually regain strength, no one is willing to predict when that will happen.
"I think the factors that are affecting the weakness of the dollar will be reversed, but no time soon," Kalter said.
The problem right now, is that "people just don't want to be holding US dollars and US-based equities," Sylvester added. "If you are an investor with a million dollars to invest, you look for the highest yield - you're looking at South Africa, Australia, New Zealand."
And it's not only the big time investors that are looking for other options.
In Peru, where savings in US dollars were long a popular hedge against inflation, many citizens are closing dollar accounts in favor of Peruvian soles.
At the same time, businesses like supermarkets, movie theaters and cable TV companies that used to accept dollars are now demanding soles.
Edwin Figueroa, a 29-year-old systems engineer, switched his checking account from dollars to soles seven months ago as the dollar's decline started worrying him. He doesn't think he'll be going back anytime soon.
The Peruvian sol "is stable now," he said. "And maybe in a year, the dollar will even go lower."
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