[R-G] A Strengthening Dollar

[Yoshie Furuhashi]

A Strengthening Dollar (The Value of One Dollar, in Euros):
<http://graphics8.nytimes.com/images/2008/10/06/business/1006-biz-DOLLAR-web.gif>
<http://www.nytimes.com/2008/10/06/business/06dollar.html>
October 6, 2008
In a Weak Climate, the Dollar Has Surprising Muscle
By MARK LANDLER

WASHINGTON — Stock markets are swooning, credit markets remain frozen,
and some foreign officials are predicting that the United States will
lose its status as a financial superpower. And yet the dollar — the
most visible symbol of America's financial might — is surging.

Last week, the dollar rose to its highest level in more than a year
against the euro, the Canadian dollar and several other currencies. It
rose even after the Bush administration's rescue plan for banks had
initially foundered in Congress and even in the wake of a dismal
employment report on Friday.

The dollar's surge seems counterintuitive. Previous financial panics —
in Asia, Russia and Mexico — devastated the local currencies, as
foreign investors stampeded for the door. The Thai baht, the Russian
ruble and the Mexican peso were reliable barometers of confidence of
foreigners in those emerging markets. As confidence crumbled, their
exchange rates did, too.

But the dollar is not like any other tender. As the de facto reserve
currency of the world, it benefits from global upheaval, even those
that originate in the United States.

"It's ironic, given that we just messed up big time, the response of
foreigners is to pour more money into us," said Kenneth S. Rogoff, an
economics professor at Harvard. "They're not sure where else to go."

On Sept. 17, when the collapse of Lehman Brothers sent stock markets
around the world reeling, foreign investors rushed to buy Treasury
bills, driving down the yield to nearly zero. That reflected the fact
that investors were flocking to the safety of the United States
government, even if it meant their investments would lose money when
adjusted for inflation.

Indeed, the appeal of the United States reflects a lack of better
options. Much has been made over the last few years about the rise of
the euro as a rival to the dollar. But Europe hardly looks like a safe
bet now, with its own crisis metastasizing.

And unlike Americans, Europeans have not fashioned a coordinated
response to the financial problems, despite a meeting of leaders over
the weekend convened by President Nicolas Sarkozy of France.

Japan's banks are far more stable than those in the United States or
Europe, which has made the yen the only major currency to rise in
value against the dollar in recent weeks. But Japan, and Asia as a
whole, is weakening, along with the global economy.

"It's like the world is full of sick people," said Ashraf Laidi, the
chief currency analyst at CMC Markets, a trading firm. "The U.S. was
the first to check into the hospital, and went into intensive care.
But then other countries started to feel the chill, and now they're
checking into the hospital."

Currency traders, Mr. Laidi said, are betting that because the United
States was the first to falter, it will be the first to recover. That
perception has gained ground with the mounting problems in Europe,
where more banks are failing by the day, and Germany and Ireland have
guaranteed all deposits in an effort to stave off bank runs.

The dollar has also been propped up the Federal Reserve, which has set
up a network of currency swaps with the European Central Bank, the
Bank of Japan, the Bank of England and other central banks to supply
dollars to foreign banks. Acting on an unprecedented scale, the Fed
expanded these swap lines by $330 billion, to $620 billion.

The resilience of the dollar amid such turmoil is more than an
economic novelty. As long as it retains its value, the dollar's
strength makes it easier for the United States to finance the $700
billion bailout, because the cash will come from bonds sold largely to
foreign investors.

A rising currency also stems inflation — a major preoccupation of the
Fed before the latest crisis. Less inflation would make it easier for
the Fed to lower interest rates, something the bank is now
considering.

But a stronger dollar has a downside: it makes American exports more
expensive in foreign markets, which could damp one of the few parts of
the American economic engine that is still humming.

The dollar's greatest value, experts said, is as a symbol of the
long-term creditworthiness of the United States. Its stability
suggests that the United States is still viewed as a safer risk.

"In talking to investors, policy makers and academics around the
world, they have this confidence, not just in our economic system, but
in our political system," Mr. Rogoff said. "They seem to have more
confidence in our ability to solve our problems than we do."

That confidence is not boundless, of course. If foreigners were
finally to lose faith, experts said, they would seek to sell their
American debt, the dollar would tumble and the cost of the bailout
would increase.

"We are in charge of the global currency, and if we make a hash out of
that, there will be near- and long-term consequences," said Edwin M.
Truman, a former Treasury department official.

Mr. Truman just completed an overseas tour, during which he said
foreign officials expressed bafflement to him about the political
chaos in Washington. But he said that when he stopped at the Reserve
Bank of Australia, he found no sense of panic about the dollar.

Before this crisis entered its latest phase, with the bailout of Bear
Stearns in March, the dollar had been on a long slide against the euro
and other currencies. That reflected foreign concerns about the
deteriorating American economy and the huge trade deficit.

When the crisis ebbs, investors will focus on those issues again, and
the dollar will resume its downward course, Mr. Laidi predicted. Even
if the bailout succeeds in calming the market, it will greatly expand
the debt of the United States — a perennial cause of weakness in the
dollar.

For now, though, the global crisis remains a tonic for the currency of
the country where it began.