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The American dollar is once again displaying considerable weakness. Against the mighty Israeli shekel, the greenback has been in virtually free-fall throughout April, but this is primarily a manifestation of dollar weakness throughout the world - although it can certainly be taken as another illustration of the strength of the Israeli economy.
The latest lurch downwards in the dollar's value has occurred against the Japanese yen, following the meeting of finance ministers from G7 countries, which issued yet another communique urging Asian countries to stop propping up their currencies by intervening in the markets and, instead, to allow them to appreciate in value. The wording of this announcement was the strongest yet used in this ongoing lobbying effort, whose primary target is China. However, since the Chinese yuan is not freely traded while the Japanese yen is, currency traders use the yen as a proxy for the yuan, and bid up the yen's value strongly.
If you are not happy with the market-babble in the preceding paragraph, let's run through this again in plain English.
The American economy has big problems. One of these, perhaps the biggest of all, is its huge and growing trade deficit, which is primarily with Asia, and within Asia, primarily with China. Therefore, the value of the US dollar has to fall. The IMF - the most important economic body in the world - recently said that the required decline in the dollar's value would have to be 'significant.' However, the best way for the dollar to decline would be for the Chinese yuan to rise. But the bottom line is that the dollar is going to fall, probably a long way. That also helps explain the recent sharp rise of gold and silver prices.
What about the euro - the other major global currency? Why shouldn't that rise against the dollar too?
There are several answers to this. One is that in the first round of the dollar's fall, between mid-2002 and late 2004, the euro rose a great deal while the Asian currencies hardly rose at all. The second is that the euro will almost certainly rise in value to some extent in the next round of dollar decline. In other words, the real issue is how to achieve a more equitable spread of the burden involved in the dollar's fall - which causes problems for other countries, since it means they will sell less to the US.
But there is another answer, too, which is implicit in the need to spread the burden: the euro, which celebrated its seventh birthday in January this year, represents the problematic bunch of economies lumped together in the European Monetary Union. All of the three big economies in the euro area - Germany, France and Italy - have serious economic problems.
Italy's are by far the worst and have been compounded by the narrow election victory of a hodge-podge, left-wing coalition that includes too many parties, of which two are Communist and most are opposed to meaningful economic reform of the sort the Italian economy desperately needs.
France's problems are less severe than Italy's, but it too has a paralyzed government which recently had to withdraw a modest effort to make a partial reform in the country's sclerotic labor market. Despite the pathetic performance of both President Jacques Chirac and Prime Minister Dominique de Villepin, it would be wrong to put the main blame on the French government: the huge demonstrations by trade unions and students proved that it is the French public that is opposed to reform of any sort.
The German economy is by far the best-performing of the trio, thanks to Germany's highly successful export industries - but the domestic economy is still very weak. On the government level, Chancellor Angela Merkel is clearly a tougher customer than her predecessor, but her 'Grand Coalition' is a cumbersome and probably ineffective vehicle for the kind of fundamental changes necessary.
In short, the euro is not very attractive. True, as soon as the Federal Reserve stops raising American interest rates, the euro is likely to become more attractive than the dollar - but that's really not saying much.
If we have reached the point where the mainstream financial press is openly discussing the possibility of Italy's underperformance resulting in its being forced to exit the common currency, then the euro faces fundamental challenges no less severe than the dollar. Until their respective governments and populations are prepared to 'bite the bullet,' the world's two major currencies are competing for the prize of wooden spoon.