After the government shutdown and debt-ceiling circus, it seems like the U.S. government is doing everything it can to diminish the stature of our dollar.
This is further illustrated by the government’s willingness to run trillion-dollar deficits and the Federal Reserve’s open-ended quantitative easing programs.
The actual impact these activities have on the currency are opaque. In a world where a currency’s value is primarily considered in relative terms -- what it is worth versus other mismanaged currencies -- and a world where sluggish global economic growth has resulted in lackluster commodity and labor prices, the government and Fed are able to indulge in these policies with some level of near-term impunity.
While the current economic consequences may be subtle, these shenanigans do however create what could be termed “headline risk” for the dollar. This headline risk is proving easy to exploit for global economic players with their own agendas, the primary culprit being China.
While the world watches our politicians squabble, the Chinese have been taking the opportunity to overtly and vocally diminish the dollar in the context of international trade.
A recent editorial from the official Chinese new agency levied sharp criticism against the dollar, calling for a “de-Americanized” world. The Chinese are clearly feeling their oats.
The U.S. dollar has long served as the medium of exchange for international trade. This status as the international medium of exchange has established the dollar as the world’s reserve currency.
This reserve currency status has created a demand for dollar denominated assets and contributed to wealth formation in the United States. It has also been a source of irritation to the Chinese government, and as China’s economic standing in the world has grown, they have made no secret about wanting to redefine this paradigm.
The Chinese have recently engineered a number of trade agreements establishing the Chinese Yuan as an international exchange medium the most recent of which was an agreement with the Eurozone. A number of foreign central banks also have begun to maintain positions in the Yuan in an effort to diversify their currency reserves.
My feelings on this issue are mixed. The U.S. government has clearly taken advantage of the dollar’s status and mismanaged its fiscal house -- to a large extent squandering the privilege created by our economy and financial markets.
But the Chinese are not qualified to throw stones. The Yuan’s value is openly manipulated and not allowed to convert cleanly in foreign currency markets. In addition, while the Chinese economy is growing quickly, it is also corrupt and primitive in its financial standards.
Going forward, the dollar may take a more balanced place in international trade, but I would be surprised to see the Yuan emerge as a viable substitute for quite some time, if ever.