OPINION The US needs to rethink its currency strategy. Its leaders are grudgingly realising that the strong-dollar policy no longer suits either national interests or current economic realities. But the dangers involved in altering the global monetary system mean that transitioning to something new is fraught with peril, and the US needs to move carefully. For years, the US maintained the official policy that a strong dollar was good for the US and for the world. That probably sounded great to a lot of people for whom the word “strong” carries positive connotations. But in fact, a strong dollar makes it harder - all else equal - for other countries to buy US-made goods. So a high exchange rate actually makes US exporters weaker in terms of their competitiveness in world markets. A strong dollar makes it harder - all else equal - for other countries to buy US-made goods.CREDIT:GETTY IMAGES That’s why the persistent US trade deficit - which has returned to its all-time high during the coronavirus pandemic - ought to give policymakers pause when it comes to trumpeting the virtues of a strong dollar. Indeed, US leaders are already making the rhetorical shift. Treasury Secretary Janet Yellen has said she wouldn’t seek a weaker dollar, but she also conspicuously fails to extol a strong dollar. The Trump administration had already flirted with the idea of a competitive devaluation of the greenback. And President Joe Biden recently named economist Brad Setser - who has been a strong critic of countries that keep their currencies low against the dollar - to be the counsellor to the US trade representative. This isn’t the first time the US has reevaluated its strong-dollar policy. In 1985, faced with mounting trade deficits with Germany and Japan, the US negotiated a managed reduction in the dollar’s value against those countries’ currencies. After the Plaza Accord, the dollar plunged in value. The agreement had the intended effect, though the trade deficit with Japan shrank only modestly. A new Plaza Accord would be difficult. While Germany and Japan are solid US allies, China, the main source of the US trade deficit today, is also the United States main geopolitical rival. Most analysts, including Setser, say China probably will not accept a large appreciation of the yuan against the dollar. Some Chinese policymakers blame the Plaza Accord for Japan’s financial bubble in the 1980s and the subsequent economic stagnation in the 1990s. That’s probably wrong - Japan’s bubble was attributable to other factors - but China probably will remain wary. So barring a new Plaza Accord with China, how can the dollar be made more competitive? One answer might have to do with the foreign exchange reserves that countries hold. Traditionally, countries around the world hold most of their foreign exchange reserves in dollars. That number has fallen slightly in recent years, from about 66 per cent in 2014 to about 60 per cent today. When foreign countries hold dollar assets, it pushes up the value of the dollar. So to bring the dollar down to a more reasonable level, the shift toward a diversified basket of reserves can and should be accelerated. Other currencies - euros, yen, pounds, Canadian and Australian dollars, and perhaps even the yuan - can join in a global basket of reserve currencies. One way to encourage this, suggested by Joseph Gagnon of the Peterson Institute for International Economics, would be for the Federal Reserve to start buying up these other currencies. Building up the United States’ own reserves of other major currencies would push the dollar down a bit, but it would also signal to the world that the dollar is no longer the world’s sole reserve currency. An added benefit of this policy would be to diversify risk in the global financial system. The world is extremely exposed to negative events in one country. If the United States were to suffer a period of intensified political violence, it would endanger banks all over the world. Shifting reserves toward a more international mix of currencies reduces this risk. Ultimately, diversifying the world’s exchange reserves would not be enough to correct the yawing US trade deficit - that would require at least a new Plaza Accord with China, and probably a general agreement among countries not to hold down the value of their currencies to prop up exports. But it would be a start. And it would signal once and for all that the era where the United States was content to prop up the dollar and see its exports suffer has come to a close. Bloomberg https://www.smh.com.au/business/mar...is-doing-with-its-dollar-20210225-p575lv.html
I've been saying for years that this "strong dollar" police only benefits the bondholders. It's not good for the overall economy. Strong dollar = scarce money Scarce money = lower economic activity Of course, the problem that the bondholders have with a weaker dollar is that a weaker dollar would increase the likelihood that debtors are able to pay back their loans and do so in a "cheaper" money.
1. Weak dollar benefits competitiveness for international trade. 2. Loose money "economic activity" is actually mostly inflation. 3. Strong dollar (greater buying power) benefits all who hold their assets in the dollar Conclusion... weak dollar promotes inflation and harms almost everyone in US.
The problem with all of this is that many other countries peg their native currencies to the US Dollar - including China.
Yes, pegging is a problem (for both sides) in the context being presented. But in that same context, the US has never cancelled it's currency. Keep in mind, obsolescence is not the same as cancellation. IMO, this aspect is NOT a problem.
I mentioned it only in the context if the US decided to unilaterally devalue the Dollar "pegging" becomes an issue.
Whether a country should have a strong currency or a weak one mostly depends on one thing: whether this country is a net exporter or a net importer. US is, so far, still a net importer i.e. it imports more than it exports. Its main exports is value-added products that seeks relatively high value and it still imports most of the inputs to its production relatively more than it exports so a strong dollar would make sense to make its cost of production relatively cheaper so that it increases its profitability. It makes less sense to embrace a weak dollar as it makes less difference in the price of its exports and yet at the same time it decreases its profitability far more than the gain it would make in the price of its exports. Plus not only that, US dollar is also a reserve currency meaning that it's a currency that is readily used around the world for all transactions not to mention it's also the go-to currency for investment of value when s*** hits the fan. The erosion of the currency value will also consequently diminish US' influence on asset and commodities prices, prices of which is increasingly being used as the inputs that is used by countries that are net exporters, huge net exporters aka *cough* C---- *cough. Is it any coincidence that China established futures exchanges in oil and other commodities denominated in CNY Renminbi currency with the oil futures trading in direct co-operation with the Saudi government? Of course it only accounts for a small % of oil futures traded on the world market. The large majority of oil futures traded is still on the CBOE in Chicago today, SO FAR. All in all, until US becomes a net exporter like China, it makes more sense to have a strong US dollar. Its current low interest to stimulate the economy might diminish the value of US dollar for the time being but eventually US should let its currency become stronger at least like before.
Which is actually bad for them if they are net exporters that earns them more money than their investment in US-denominated assets.