[FoRK] oil producers shun dollar

Ian Andrew Bell < hello at ianbell.com > on > Tue Dec 12 15:53:12 PST 2006

Thank God Bush is convening a three-day summit to plan the war in  
Iraq three years after embarking upon it.  At any rate, that's old  
news, kids.  That giant sucking sound is the decline of relevance of  
the U.S. and the air deflating its sustained-growth economy, taking  
much of the rest of the world with it.  Does Emperor George play the  



The Fall of the Mighty Dollar

By Christian Reiermann

Is an end of an era looming in the foreign exchange markets? The  
dollar has been depreciating against the euro for weeks. Currency  
experts and the German government don't yet see this as cause for  
alarm. The US currency's role as a lead currency isn't as important  
as it used to be, they say.

Worried about the dollar: The guardian of the euro, European Central  
Bank President Jean-Claude Trichet.

Like most central bankers, Jean-Claude Trichet, the president of the  
European Central Bank (ECB), has a penchant for cryptic comments.  
Injecting a certain degree of incomprehensibility is a signal to the  
professionals that he's competent. And when it comes to laymen,  
industry jargon has the desired effect of generating the necessary  

Last Thursday the public was treated to yet another example of  
Trichet's convoluted speaking style. A number of risks, the ECB  
president said, could jeopardize a generally favorable economic  
outlook in the euro zone. They included, according to Trichet,  
"concerns regarding possible uncontrolled developments triggered by  
global economic imbalances."

What Europe's most powerful protector of the currency was actually  
saying was this: The gradual decline of the dollar in the foreign  
currency markets in recent weeks could pose a threat to the economy.  
What Trichet was also trying to broadcast is that the ECB has  
recognized and is aware of the threat.

Nevertheless, the European Central Bank in Frankfurt again increased  
its key interest rate on Thursday by a quarter percentage point to  
3.5 percent, which makes the euro more attractive to international  
investors. The central bankers had no choice but to take the step,  
having already announced their intentions weeks ago.

Experts have been predicting for some time that the dollar would  
eventually go into a nosedive, and now that time seems to have come.  
The US currency has lost five percent of its value against the euro  
since late October, and 13 percent since the beginning of the year.  
The euro is currently fluctuating around a value of $1.33, which is  
only 3 cents away from its all-time high in 2004. And yet Trichet's  
counterpart Ben Bernanke, the chairman of the US Federal Reserve, has  
done nothing but look on as the dollar plunges.

A sea change appears to be taking place on the international  
financial markets. For years, global capital flowed in only one  
direction, with $2 billion going into the United States every day.  
Investors viewed the world's largest economy not only as a bastion of  
stability, but also as a place that promised the best deals, the most  
lucrative returns and the highest growth rates.

The Americans, for their part, welcomed foreign investment. For them,  
it was almost a tradition to save very little and spend more than  
they earned -- essentially achieving affluence on credit. Foreigners  
financed the Americans' almost obsessive consumer spending, which  
spurred worldwide economic growth for years.

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Spiegel's and Spiegel Online's international coverage in your In- Box  

Because the US government was unable to fall back on the savings of  
its citizens, it too was forced to finance its budget deficit with  
foreign capital. Both consumer spending and the federal deficit kept  
the dollar high, because the rest of the world was practically  
scrambling to invest in the United States.

This phase seems to have come to an end, at least for the time being.  
"There are fundamental weaknesses in the American economy. This could  
not continue in the long term," says Alfred Steinherr, chief  
economist at the German Institute for Economic Research (DIW).

Investors pulling out

Investors worldwide are becoming sceptical and starting to pull their  
money out of the United States. They have realized that a people and  
a country cannot live beyond their means in the long term. The US  
dollar's exchange rate is starting to crumble as a result of this  

The depreciation is causing growing concern about what will happen to  
the global economy if the United States loses its role as an engine  
of growth. If German cars, machinery and services become more  
expensive, will the German economic recovery end before it has really  

The German government isn't worried yet, at least not officially.  
Nevertheless, experts in the finance and economics ministries have  
been keeping a close eye on developments. Although they continue to  
believe that the changes still fall within the scope of long-term  
averages, they don't rule out that the situation could worsen.

They believe that a first critical threshold for the competitiveness  
of the German economy will be reached at an exchange rate of about  
$1.36 per euro, and that Germany could see major difficulties at  
rates in the neighborhood of $1.50. If there is turbulence in the  
foreign currency markets, the government in Berlin will find itself  
in an especially challenging position. In early 2007, Germany will  
assume the chairmanship of the so-called G8 group of seven major  
industrialized nations plus Russia.

The G8 has repeatedly engaged in crisis management to deal with  
problems in the international financial system. It did so in the  
1980s, when the combined forces of the G8 were needed to put a stop  
to the soaring dollar. It stepped in with equal verve a few years to  
forestall a decline in the American currency with the so-called  
Louvre Accord.

There are two principal causes behind the most recent development.  
Both have to do with the fact that Europe is becoming more attractive  
for international investors compared to the United States. On the one  
hand, interest rates in Europe and the United States are moving in  
opposite directions. "The ECB will continue to raise its key rates  
next year, whereas interest rates appear to have peaked in the USA,"  
says Joachim Scheide, an expert on the economy at the Global Economic  
Institute (IFW) in the northern German city of Kiel. This means that  
financial investments denominated in euros are yielding higher  
interest and are in greater demand internationally, which in turn  
leads to a rise in the euro.

The prospects for growth are also shifting. The US economy is cooling  
off. The government recently lowered its 3.3 percent growth forecast  
for 2007. If Americans consume less as a result of a decline in  
foreign capital investment, the United States could even face a  
prolonged period of more modest growth.


On 12-Dec-06, at 7:50 AM, Eugen Leitl wrote:

> http://www.ft.com/cms/s/277471c2-8889-11db-b485-0000779e2340.html
> Oil producers shun dollar
> By Haig Simonian in Zurich and Javier Blas and Carola Hoyos in London

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