Hated Currency

The price of gold has climbed to record heights and it has everything to do with the weakening dollar. The American currency is under pressure as a result of very low interest rates, an increasing fear of inflation and severe economic problems in the United States. All this causes investors to turn away from the dollar and flee to the safe haven of gold.

What also influenced the American dollar yesterday was the message that a number of countries, including the Gulf states, France, China, Russia and Japan, have talked behind the U.S.’s back about the possibility of replacing the dollar as a currency for crude oil with a basket of other currencies. Even though the message has been laughed away in the U.S., it has simultaneously caused some unrest because it made it clear that the position of the dollar as an international payment method and reserve currency is not unassailable.

An alarm bell did go off. “They hate the dollar,” an American financial columnist wrote yesterday, blaming the others and slightly passing by the intrinsic weaknesses of the dollar. The U.S. has been able to profit for many years with its dollar as the international payment method of choice and a reserve currency for brokers and investors worldwide. Exchange rate fluctuations were a problem for other countries, but the U.S. was hardly ever bothered by them. But you have to earn the status of international reserve currency, and it is never permanently acquired.

It is understandable that other countries are tired of the weak dollar, which erodes their export earnings and reduces the value of their international investments, and that they will go out looking for alternatives. On paper, it is easy to replace the dollar as a currency for oil by a currency basket; in practice it is a lot more difficult. But that it is given some thought is significant. It is a signal that, after the political and military hegemony of the U.S., its economic hegemony is also being challenged. The financial crisis that developed in the U.S. has done considerable damage to the American reputation. Other countries, such as Russia, China and Brazil, are no longer prepared to dance to the U.S.’s tune and will stand up for their interests more forcefully.

The U.S. can ignore that signal and let the dollar weaken further, stemming from the conviction that they do not care. But the weaker the dollar, the less attractive it becomes for foreign brokers and investors, and the chance becomes more likely that they will trade in the dollar for another currency. That is not without danger for the U.S. If the dollar loses its position in the international raw materials market, the currency can, as has been calculated, cause a loss of value of 50 percent over a ten year period. That would signify a considerable loss of spending power for the U.S. It might not hurt if the country begins to take the weakening of its currency seriously.