The dollar and antidollar divide

Business leaders should accept that global economies can be split into two camps – the US currency and everything else.

By PINCHAS LANDAU
Bibi netanyahu (photo credit: JPost Staff)
Bibi netanyahu
(photo credit: JPost Staff)
In the wake of last week’s European summit and the almost-inevitable disappointment that it generated – as the leaders not only failed to produce a convincing rescue plan, but also exposed the split between the Franco-German axis and the UK, presaging the latter’s eventual exit from the EU – the euro plunged in value. Whereas last Friday, the single currency was still trading near 1.35 to the dollar, by Wednesday of this week it had dropped below the 1.30 level, for the first time since January of this year.
However, it is not only the euro that lost value. All European currencies, even those representing countries inside the EU – such as the UK, Switzerland, Sweden, Denmark and even oil-rich Norway – fell in tandem with the euro. Some fell less sharply, a few even more, but they all went down. Money fleeing from the euro did not stop in the European neighborhood. Nor did leading non-European currencies fare much better. From Australia to Canada, from Singapore to South Africa to South Korea, they were all down too. Again, the degree of decline varied, but not the basic phenomenon.
There is actually nothing new about this. After four-and-a-half years of financial crisis, including periods of crash, rebound and treading water, we ought to have learned a few basic lessons about how the markets relate to degrees of crisis – especially the foreign currency markets. Anyone reviewing the period as a whole would be able to point out the single most outstanding feature, which is that basically the whole world can be divided into two very unequal camps. There is the US dollar and then there is all the rest, which for simplicity’s sake can be labeled the “antidollar.” When there is a crisis, the dollar goes up and everything else goes down. When the sense of crisis ebbs – whether for an hour, a day, a week or even a year – then the dollar goes down and everything else goes up.
It used to be slightly more complicated. Until this past summer, whenever fear became the paramount emotion at work in the markets, the ensuing flight to safety encompassed not just the dollar, but also the Swiss franc and the Japanese yen. Conversely, when fear ebbed and hope surged, the dollar dropped and so did the other two, though they tended to drop less than the dollar, making them more effective “safe havens” than the dollar itself.
Indeed, so effective was the Swiss franc at providing a shelter that it attracted more and more financial “refugees” and its value rose so far and so fast that it threatened to strangle the entire Swiss economy. This forced the Swiss authorities to do the previously unthinkable and unimaginable, namely deliberately destroying the value of the world’s hardest currency. The franc sank and has continued sinking. No one can believe any longer that it can serve as a reliable source of protection.
The yen, too, rose in value over recent years, even against the dollar when the dollar was itself rising against other currencies – and also against the euro when the dollar was falling. Here, too, the currency’s overvaluation has made it an enemy of the economy of its own country, but the feckless Japanese government has failed to show the determination of the Swiss in saving themselves. However, the market eventually does its thing and the Japanese economy – helped by the natural disasters of March and the nuclear disaster that followed – has lost competitiveness, to the point that it is running a trade deficit. So unnatural an economic phenomenon as a Japanese trade deficit is further evidence of how the old verities have been annihilated in the new economic world taking shape. The Japanese eventually intervened in late October to push their currency lower, and it has stayed lower since then, despite the renewed bout of dollar strength.
The result is that the dollar/antidollar divide is now absolute. There is only the US dollar on one side and everything else on earth on the other side. Why that should be is not obvious, and many people vehemently reject the rationales usually put forward to explain it, such as the mindset that investors ultimately have to put their money somewhere and in terms of confidence and reliability, despite his manifold problems and failings, Uncle Sam is still the least bad of the bunch. But it should now be clear that it’s not worth arguing about why the world is divided into dollar and antidollar. Instead, the brutal fact should be accepted as such, and businessmen and investors should act accordingly.

landaup@netvision.net.il