Global Agenda: What goes around...

From the point of view of Americans, the decline in the dollar is the only game in town.

global agenda 88 (photo credit: )
global agenda 88
(photo credit: )
Picking up from where last week's column left off, we note the continued surge in the Swiss franc - successive all-time highs against the dollar this week - and the Japanese yen, as the dollar continues to plunge on global markets. From the point of view of American households, investors and especially firms, the decline in the dollar is the only game in town, with the dollar falling across the board against virtually every currency on earth. The fact that the rate of the greenback's decline against various currencies has been, and continues to be, very different across different periods of time, is a detail lost in the thunderous roar of the general collapse. But for everyone else, this is not a detail but a critical issue. The example of the Swiss franc is very illustrative: over the five years since the dollar started falling, the Swissie has risen against it along with all the other currencies. But in the last couple of years, as the carry trade expanded and more and more players sold the franc to finance more speculative investments, this rise came to a halt and even went into partial reverse. Measured against euro, sterling or other currencies, the franc has performed poorly - falling from 1.40 euro to as low as 1.68 a few months ago. In other words, the Swiss franc was not an efficient way of protecting against the dollar's decline - until quite recently. As late as June of this year, you could get 1.24 francs for a dollar, but that was before the sub-prime crisis blew up. After the massive rush into Swiss francs over the last few weeks, as the carry trade unwinds, one dollar barely gets 1.10 francs - and the franc has risen appreciably against other currencies too. Sterling, on the other hand, is losing its luster as rapidly as the Swiss franc is regaining the luster it lost. Sterling was having a great time against the dollar, hitting the level of $2 per pound in April, reaching 2.05 in July and climbing as high as 2.11 - the highest level since the early 1980s - just a few weeks ago. Now, however, sterling is only around 2.06 to the dollar and losing ground steadily against other currencies. In January, one euro was worth less than 66 pence, but now you need 72 pence to buy it - and this month sterling has plunged even more than the dollar against the franc and the yen. Most people prefer to ignore these gyrations, on the grounds that "it's all speculation" and hence beyond normal comprehension, as well as being vaguely immoral. One reason for this attitude is the degree to which people's relationships to currencies are entrenched and, ultimately, irrational. In reality, however, the decline of the dollar - which has been underway since 2002 and which has recently picked up speed as the Federal Reserve has cut US interest rates - has been entirely rational and predictable as a long-term phenomenon, despite the fact that what will happen on the market tomorrow or the next day is virtually unpredictable. Nevertheless, most American investors have done little or nothing to diversify out of the dollar, in order to protect the value of their financial assets. Many feel that to do so would be in some way unpatriotic, others simply claim that they don't know how. Most remarkable is the attitude of expatriates, such as the many Americans living in Israel. They lack the excuse of "native" Americans, that the foreign exchange markets don't affect their daily lives (which is nonsense, but at least understandable). These Americans-in-Israel observe the remorseless slide in the dollar's value against the shekel and relate to it as an outside force over which they have no control, on a par with global warming. Often they will "explain" their paralysis by noting that "it will come back in the end" - and indeed, the historical record shows that currency swings tend to "come back," after ten, twenty or even more years…. Sterling looks like it may well go the same way. The underlying problems of the British economy are not very different from those in the US, especially with regard to housing and consumer debt. The currency has been supported by high interest rates and by the long housing boom. When the latter fades - let alone collapses, as did the American one - the former will also erode, and the currency may well fall a long way and/or for a long time. Rather than wait another 25-30 years for the cycle to come full-circle again, it might be preferable to find a better alternative in which to sit out the decline.