Is heavyweight US dollar down for the count?

Dennis Morrison, Contributor

Just when Jamaicans are getting pumped up about the upcoming World Athletics Championships in South Korea, we have been hit by the bad news that one of our leading sprinters, Steve Mullings, has tested positive for a prohibited substance. We are yet to find out the details regarding the nature of the violation, but this 'adverse analytical finding', as it is termed in anti-doping jargon, once again is bound to trigger drum-beating about the basis of the dominance of our sprinters.

Obviously, we would all prefer that none of our athletes are found to be relying on drug enhancement to power their performances on the track, and we would regret if any are, but if so, better they be detected right here. For, it is vital to the reputation of our athletes that we demonstrate to the world that there is an effective anti-doping system in place here in Jamaica. On the brighter side, Jamaica is fortunate to have such a depth of high-calibre male sprinters that the absence of Mullings is hardly likely to affect our medal-winning prospects.

Turning to world economic events, this past week brought a roller-coaster ride on global financial markets that was unprecedented. Tremendous wealth loss took place, confidence has been shaken, and the negative psychology of investors may well precipitate another recession. Neither financial analysts nor economists can say with any great degree of certainty what the road ahead will be like, particularly because political leaders in the US and Europe, the centre of the crisis, have lost their footing in terms of what is to be done, and are short on credibility with their publics.

Fading superpower status

One feature of the current situation is how it has amplified the erosion of American superpower status in the world economy. For example, over the past decade, the position of the US dollar as the only real reserve currency has come under increasing challenge from China and several oil-producing countries that saw the value of their US-dollar reserves decline. With the US running large recurring deficits in its external accounts and relying on its reserve-currency status, these countries have been looking to diversify their currency holdings.

In the current crisis, investors have fled to the Swiss franc and the yen as safe-haven currencies, pushing up their values by 20 per cent and 11 per cent, respectively, against the US dollar, for the year ending July 2011. Indeed, virtually all currencies rose against the US dollar in this period. Conscious that the strengthening of their currencies could hurt their exports, both the Swiss and the Japanese have been taking measures to discourage these movements.

It is hard to imagine that Brazil, a country which 20 years ago was regarded as most prone to debt crises and perpetually fighting hyperinflation, could have seen its currency rise by more than 30 per cent against the US dollar over the past two years. And it has done this while recording strong economic growth and relative overall stability in its economy. Sure, the country's commodity export boom has played a big role, but it has also been bolstered by broad-based industrial expansion. Australia, another strong commodity exporter, now boasts a strong currency, with its dollar having appreciated by around 40 per cent against the US dollar since the end of 2008.

Currency diversification

Is it that the 'almighty dollar' will soon lose its prestige? All indications are that there is a developing trend to diversify currency holdings by emerging countries such as China. Still, the US maintains the deepest and most liquid financial market that can absorb the mounting surpluses of these countries, and this will limit the speed of diversification away from the US. The significance of this showed up last week as investors suffering whiplash from the wild market swings sought safe haven in US government bonds.

Also, attempts to speed up diversification would themselves put pressure on the US dollar and undermine the value of the holdings of these emerging countries. It is the case as well that China is heavily dependent on the US as a key market for its exports and that the US is running huge trade deficits on this account. China, therefore, has a vested interest in channelling surpluses back to the US to cover these deficits - a kind of symbiotic relationship tagged 'Chimerica' by some analysts.

The other challenge to the US dollar was expected to come from the euro. That appears to be now in serious doubt in light of the deepening instability in the region's financial system and weaknesses that have been exposed in fiscal and monetary policymaking arrangements. So though the US dollar is losing its imprimatur, an alternative has not yet emerged even if the loss of confidence is driving a rush to gold.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.