After the financial crisis, US dollar-bashing has become en vogue. These days, there are no shortages of commentators who are predicting its demise. One of them was interviewed by IBTimes here.
Marc Chandler, however, has emerged as a defender of the US dollar and 'empire,' as he calls it. Chandler is the global head of currency strategy at Brown Brothers Harriman. In late 2009, he published a book titled Making Sense of the Dollar to spell out this defense.
Chandler shared his views on the dollar in an interview with IBTimes.
First, there is the misconception that the allegedly large US trade deficit spells doom. Critics claim this proves the US no longer makes anything the world wants.
However, Chandler said the new model of US corporations is to ‘build locally, sell locally.’ (This year, foreign affiliates of US multinationals will sell $4 trillion worth of goods).
The US government's calculation of trade balance doesn’t accurately account for this phenomenon, said Chandler.
The calculation also has other flaws that overstate the US trade deficit.
For example, when Americans buy an iPod for $299, it counts as a $150 trade deficit of the US to China, the country of the iPod’s final assembly.
However, China only earned about $4 in the entire production process.
“That’s a mis-measurement,” said Chandler.
The presence of US global commerce, therefore, is much more than what the trade deficit data suggests.
Vehicle & Reserve Currency
But the use of the US dollar isn’t just limited to the international business activities of the United States, said Chandler.
The dollar is the dominant reserve currency of the world. It’s the world’s preferred vehicle currency, or currency used as a method of payment in international trades. Important commodities like oil, silver, and various agricultural commodities are traded internationally in the US dollar.
Even some consumer products are traded in the US dollar, he said.
So when Saudi Arabia receives US dollars for selling their oil, they sometimes use the same dollars to buy consumer goods from Europe.
Critics, however, argue that the decline of the US economy should threaten the dollar’s global reserve and vehicle currency status.
In response to that, Chandler said changes to the global reserve currency status happen extremely slowly. When the United Kingdom's pound sterling finally lost its status (to the United States dollar) as the global reserve currency, it was already only the third or fourth largest economy in the world, he said.
The US, of course, is still the largest economy in the world, so by this logic, the dollar’s reign will continue for some time to come.
Moreover, the ‘catching-up’ of other economies doesn’t necessarily mark the end of the US reign.
The unprecedented dominance of the US economy post-WWII is an anomaly, said Chandler. Europe was in shambles, India had a backwards economic system, and so did China. Therefore, the ‘catching-up’ of these countries is only natural.
Lastly, the reserve currency status of a currency isn’t just a function of its underlying country’s economic size.
Japan, for example, is larger than the United Kingdom, yet the yen is currently a less used reserve currency compared to the pound sterling. Similarly, Switzerland is the 19th largest economy in the world, yet the Swiss franc is likely the 7th most used reserve currency in the world.
The euro was previously the US dollar’s challenger, but now the Chinese yuan is eyed as the main contender. A primary reason is that the Chinese economy and trade volume is expected to grow tremendously and perhaps surpass those of the US within a few decades.
However, assuming that’s true, the yuan still might not become the global reserve currency.
First, progress is limited so far, even as China becomes the second largest economy in the world. Chandler said according to a Bank of International Settlements (BIS) survey, the turnover of the yuan in the foreign exchange market actually declined from 2007 to 2010.
The Chinese economy, financial system, and yuan – from the perspective of the international community – also lack transparency, which makes the yuan a less attractive currency internationally.
Then there is the fact that the yuan is not fully convertible, so it has limited use outside of China.
The internationalization of the yuan is “grossly exaggerated,” concluded Chandler.
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