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Business

The end of the dollar's reign?

Text by FRANCE 24

Latest update : 2009-02-17

For half a century, the greenback has dominated the world's financial system, serving as the currency of choice for governments seeking a safe haven to store their money reserves. But are those days now numbered? (P.Alexandre/ S.Le Belzic/ C.Giraud)

Supermodel Gisèle Bundchen is rumoured to have demanded contracts in euros rather than dollars. True or otherwise, it's a sign that the US currency is no longer top dog.

Iran and Venezuela have turned their backs on the currency for political reasons, nuclear giant Areva for economic ones. The French company is asking China to pay for its powerstations in euros.

The greenback has been king of the world economy for nearly forty years, but has now lost over a third of it's value compared to other currencies. So why the fall from grace?

Above all, analysts say the problems lie with the US economy. With America increasingly living beyond its means, dollars have been printed in order to absorb an enormous national deficit, predicted to reach almost 500 billion euros in 2008.

The dollar's fall has accelerated in the wake of the sub-prime crisis that began last summer. While there is no panic on wall street just yet, many on the trading floor are less than optimistic.

At Tradition Viel, one of the world's biggest brokers, there's concern over how long the current situation can last.
 
"The American deficit is financed by an influx of capital representing practically 2 billion dollars a day, so for how much longer will overseas investors, especially Asian ones, be prepared to buy American assets to finance this deficit, knowing that the dollar is depreciating by the day," asks the  firm's market strategist Guillaume Melissi.

The dollar's depreciation is worrying the Chinese, and with China posessing a quarter of US bonds, analysts say Beijing is unlikely to remain inactive.

"The Yuan will never be a political weapon, but if the Chinese government has reserves of 1,530 billion dollars it's a  weapon nonetheless," says Weiping Huan, Professor of Economics at Renmin University in Beijing.

 

"For Beijing the priority is to protect the value of this reserve and help it grow. With the fall of the dollar this value is diminishing so if we really want to talk politics, I'd say China shouldn't accept its wealth being plundered."

"But we'll never use our reserves as a weapon, we don't want to upset the current world system if our reserves enter the market it'd be a real bombshell but as a great country. China won't play with fire like that and will act responsibly."

And China is not the only nation wanting to get in on the act. Along with Russia, India and Brazil, the country is one of the big new players in global finance.

"These four countries represent nearly 50% of world exports, nearly 50% of world energy consumption, more than 15% of gross domestic product and have just 3% of foreign currency reserves," explains one analyst.

So is the dollar's reign really over? According to many experts, a new international monetary era is on its way as the dollar's monopoly gives way to a tri-polar system: a dollar zone in america, a Euro-zone in Europe and Asian markets dominated by the Yuan.

Date created : 2008-05-03

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