Badmouthing the Greenback

Though I have been talking about a weak U.S. dollar for some time, it appears that critics of the currency are gathering momentum and greenback bashing has recently escalated into a media frenzy. The result has been a very bad run for the dollar, with the greenback hitting a 14-month low against competing currencies.

In a nutshell, other countries are getting frustrated by getting paid in eroding U.S. dollars for their respective commodities such as crude oil, wheat, copper and other materials. The latest dustup came after a British paper, the Independent, implied that the Gulf Arab states are plotting with China, Russia, Japan and France to eventually end the pricing of crude oil in U.S. dollars. The panic weighed heavily on the currency, though the claims are dubious and any such action is a long ways off.

This development goes to show you the depth of outrage over America’s currency. A lot of the international frustration is due to the fact that as the U.S. dollar continues to decay, the U.S. economy gets more competitive around the world. Favorable exchange rates make American-made goods cheaper, and make it more expensive to sell goods in the U.S. That doesn’t seem fair to other countries, who are seeing exports suffer due to weak consumer spending.

This trend of booming American exports was evident in a recent Commerce Department report that stated the U.S. trade deficit unexpectedly declined 3.6% in August due to a surge in exports. Cheaper prices for American-made goods abroad was largely responsible for spurring demand. In the past year, the trade deficit has plunged 49.6% as exports have become more affordable overseas.

Additionally, the criticism of the dollar sparked a flight to gold recently, pushing the precious metal to yet another high. Some investors are still looking for a safe haven, but others are speculating that criticism about the U.S. dollar may actually result in a movement away from the greenback as the world’s reserve currency and that a basket of currencies and commodities could be an alternative. In fact, the United Nations has been quietly pushing for a new global reserve currency and called for an end to the dollar’s supremacy.

In plain English, some countries are tired of America getting all the privileges associated with being the world’s reserve currency. And they want a piece of the pie.

I’ll level with you: Most of this is just hot air, and I do not anticipate any serious move away from the dollar. Aside from the political implications, the logistics of such a switch are almost overwhelming. But it’s easy to understand why other countries are complaining–and why they are badmouthing the dollar as a result.

Either way, the fact that the dollar hit a 14-month low due to all the criticism shows that the fuss over the greenback can indeed have a big impact on the markets whether or not any change ever comes to pass. Because of all this persistent negativity–not to mention America’s staggering budget deficit and low interest rates–it is a near impossibility that the U.S. dollar will firm up anytime soon.

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