By Bernard Condon, Associated Press Business Writer
New York (AP) – Among the threat prices present themselves to the American economy, none can be as strange as the sale in the dollar.
The currencies increase and decrease all the time due to the fears of inflation, the movements of the central bank and other factors. But economists fear that the recent drop in the dollar will be so dramatic that it reflects something more worrying when President Donald Trump is trying to reshape world trade: loss of confidence in the United States
The domination of the dollar in cross -border trade and as a refuge was nourished by administrations of both parties for decades, because it helps us to reduce costs and allows Washington to project power abroad – enormous advantages which could possibly disappear if faith in the United States was damaged.
“World confidence and dependence on the dollar have been built in half a century or more,” said the University of California, Berkeley, Barry Eichengreen economist. “But it can be lost in the blink of an eye.”
Since mid-January, the dollar has dropped 9% compared to a currency basket, a rare and steep drop, at its lowest level in three years.
Many investors frightened by Trump do not think that the dollar will quickly be pushed from its position of global reserve currency, rather expecting a slow drop. But even this is sufficiently frightening, given the advantages that would be lost.
With a large part of the world goods exchanged in dollars, the demand for a currency has remained strong even if the United States has doubled the federal debt in a dozen years and did other things that would normally send fleeting investors. This has enabled the US government, consumers and businesses to borrow from abnormally low prices, which has helped speed up economic growth and raise living standards.
The domination of the dollar also allows the United States to push other countries such as Venezuela, Iran and Russia by locking them with a currency they need to buy and sell with others.
Now that the “exorbitant privilege”, as economists call it, is suddenly at risk.
The fall of the dollar is strange
“The properties of Safe Haven of the dollar are eroded,” said Deutsche Bank in a note to customers earlier this month by warning a “crisis of confidence”. Adding a more circumspect for Economics Capital, “it is no longer hyperbole to say that the dollar reserve status and the wider role are at least somewhat in question.”
Traditionally, the dollar would strengthen when prices flow for the demand for foreign products.
But the dollar has not only failed to strengthen this time, it fell, perplexed economists and injured consumers. The dollar has lost more than 5% against the euro and the book and 6% against the yen since early April.
As any American traveler abroad knows, you can buy more with a stronger and less dollar with a weaker. From now on, the price of French wine and South Korean electronics and a host of other imports could also cost more due to prices but also a lower currency.
And any loss of safe status could strike American consumers in another way: higher rates for mortgages and car financing agreements, as lenders require more interest in additional risk.
Federal debt disorders
More worrying is possible higher interest rates on the American federal debt in balloon, which is already risky of 120% of American annual economic production.
“Most countries with this debt towards GDP would cause a major crisis and the only reason why we would get it is that the world needs dollars with which to exchange,” explains Benn Steil, economist at the foreign relations council. “At one point, people will seriously examine the alternatives to the dollar.”
They already have, with a little help from an American economic rival.
China has concluded trade agreements only in Yuan with Brazil for agricultural products, Russia for oil and South Korea for other goods for years. He also granted loans in Yuan to central banks desperate for liquidity in Argentina, Pakistan and other countries, replacing the dollar as a donor of the last appeal.
Another possible American alternative in the coming years if their market is developing: cryptocurrencies.
Said the president of BlackRock, Larry Fink, in his annual shareholder letter over the domination of the dollar “, if the deficits continue to skyrocket, America is likely to lose this position against digital assets like Bitcoin.”
Not everyone is convinced that a great reason why the dollar falls is due to the loss of confidence in the United States
Steve Ricchiuto, economist at Mizuho Financial, says that the weakness of the dollar reflects the anticipation of higher inflation due to prices. But even if investors are not also comfortable to have dollars, he says, they really don’t have much choice. No other currency or other active, such as yuan or bitcoin or gold, is large enough to manage all demand.
“The United States will lose the reserve currency when there is someone to remove it,” says Ricchiuto. “For the moment, there is no alternative.”
Erratic policy scares investors
Maybe yes, but Trump is testing the limits.
It is not only the prices, but the erratic way that it has deployed them. The unpredictability makes the United States less stable, less reliable and a place less safe for their money.
There are also questions about his logic justifying politics. Trump says that American prices will lead to trade deficits, which he cites as proof that countries “tear up” America. But by calculating the prices, he only looked at trade deficits only in goods, and not on the services in which the United States excellent. Most economists believe that trade deficits are not a sign of national weakness because they do nothing to hinder economic growth and prosperity.
Trump has also repeatedly threatened to withdraw to the independence of the federal reserve, which makes it fear that it will force interest rates to increase the economy, even if it may turn on the test inflation. It is a safe way to bring people to flee the dollar. After the President of the Fed, Jerome Powell, said on Wednesday that he would expect to make rate movements, Trump exploded him, saying: “Powell’s dismissal cannot come quickly enough!”
Economists criticizing the announcement of Trump’s April 2 tariff recalls another event, the 1956 Suez crisis, which broke the back of the British book. The military attack on Egypt was poorly planned and seriously executed and exposed British political incompetence which has flowed confidence in the country. The pound has dropped sharply and its position of several centuries while the dominant trade and reserve currency collapsed.
Eichengreen de Berkeley said that on the release day, as Trump called on April 2, could be recalled as a similar turning point if the president was not careful.
“This is the first step down of a slippery slope where international confidence in the US dollar is lost.”
Originally published:
California Daily Newspapers
