The US dollar ended another volatile week last week as the US subprime mortgage problems continued to weaken investors' confidence in the US economy. The US currency has continued to show substantial depreciations against most of the European currencies as well as many of the Asian units. At home, the NT dollar surged to a nearly 11-month high of 32.288 per US dollar on Friday.
What added pressure on the US dollar were US Federal Reserve Chairman Ben Bernanke's remarks on Thursday that the US will be faced with more economic tough times.
Just as economists were debating on where the greenback would be heading after hitting all-time lows, and as major European economies were voicing concern about their surging currencies and the impact on exports, came comments by senior Chinese officials about diversifing their nation's foreign reserves, which weighed down the US currency even more
Suddenly it appeared as if everyone was worried about the US dollar losing its predominant role. But is the dollar really in danger of losing its position as an international reserves currency, as some Chinese officials suggested? Or was Beijing simply trying to deflect Washington's persistent demands that the yuan be revalued?
Rhetoric aside, people should not take the comments by Chinese officials too seriously. The US currency will continue to be used in international commerce and will retain its leading position in foreign exchange trading. It did not attain its dominant status by accident. It was firmly supported by the country's economic potential in a broader view.
It is also too early to say whether Beijing will sell a lot of US dollars to adjust the structure of its foreign currency reserves. It simply may -- like many other countries -- be buying more euros and other stronger currencies in lieu of selling US dollars, as long as reserve diversification matters.
But the concern over the US dollar's dominant role does reflect the declining confidence in the US economy and indicates a growing impatience with the disparity between what US policymakers say and what they do to support their slumping currency.
There's no sign that the US dollar will reverse its downward trend anytime soon given the current economic fundamentals. Interestingly, Washington may actually welcome a gradual but consistent depreciation of the dollar as this would boost US exports and trim its trade deficit.
The latest trade tallies from the US Commerce Department showed that US exports rose 1.1 percent year-on-year to a record US$140.1 billion in September, reducing its trade deficit by 0.6 percent in the month to US$56.5 billion, the lowest since May 2005.
The question is how the US government aims to balance a relatively weak US currency without pushing the currency so low that it builds up inflation pressures at home because of the surging costs for crude oil and other imported goods.
Just as a strong euro is harming exporters in the Eurozone economies, the increased values of Asian currencies will also create potential asset bubbles in emerging markets after more capital flows from US dollar assets to pursue high investment returns in these markets.
Whether the US dollar is losing its dominant role is not an issue, but disorderly greenback movements are. Monetary policymakers worldwide need to take this issue seriously and take concerted action if necessary.
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