Sammy Looks at the View of Currency… From Abroad

Reader sammy sends along some comments…


This blog has a lot of commentary on the US economy, most of it is pessimistic. It is always interesting to read what our “competitors” in the world economy think about the US. This article is titled “Is the puny dollar a sign of America’s Decline?”

Yesterday, the pound and the euro hit their highest levels in a generation against the US dollar. The dollar, meanwhile, collapsed to a record low against an average of all the world’s major currencies. It is tempting to interpret the flight from the dollar in financial markets as the clearest, most objective, indicator of America’s relative decline.

Europe has long been derided as an ageing, sclerotic continent, doomed to irrelevance in a world dominated by America and Asia. But could it actually be America, not Europe, that is failing to compete in the globalised world economy and is now threatened with long-term decline?

From this standard doom and gloom opening, the author Anatole Koletsky, (see bio with the article) comes to some non-standard conclusions.

Sadly, for those of us who live in Britain and Europe and would like to believe that the strength of our currencies reflects our superlative economic prospects, the answer is an emphatic no.

…..since the deregulation of currencies and financial markets in the 1980s and 1990s, currency strength has conveyed almost no information about the health of a national economy and none at all about a country’s competitive position in global trade. For example, anyone who believes that the falling dollar reflects America’s huge trade deficit and foreign borrowing should consider that the one leading currency even weaker in the past three years than the dollar has been the yen; yet Japan has the world’s biggest trade surplus and is the greatest creditor nation the world has ever seen.

To the extent that any relationship has existed between currencies and economic performance, it has usually been the wrong way round rising currencies usually preceded periods of economic decline, while weakening currencies have presaged economic strength.

Americans, meanwhile, will enjoy the benefits of a super-cheap currency, which will more than offset falling property prices and problems with a small minority of mortgage loans. American politicians, for all their faults, instinctively understand this, which is why they have generally welcomed a falling dollar and have been pressuring China and Japan to let the dollar weaken against the yen and the renmimbi not just, as at present, against the euro and the pound

Fascinating stuff. Some good correlations that back up his contentions. Remember this is a competitor.