Magazine article Newsweek

A Safe Haven's Risks; A Crisis, like a Large-Scale Terrorist Attack, Might Send Investors Fleeing from Dollars to Other Currencies

Magazine article Newsweek

A Safe Haven's Risks; A Crisis, like a Large-Scale Terrorist Attack, Might Send Investors Fleeing from Dollars to Other Currencies

Article excerpt

Byline: Fareed Zakaria

The economics of the dollar make perfect sense. As other countries--notably in Asia--grow in wealth, they need to put their money somewhere. U.S. Treasuries are the obvious choice. Doing this keeps U.S. interest rates low, which allows Americans to borrow and spend--on Asian goods. In short, they save, we consume, both our economies grow, and everybody's happy. (Well, except the Europeans. Their currency rises, and their exports get more expensive. But they can't do much about it.) This is the Bush administration's stance. If the dollar falls over time, fine. It makes American exports cheaper and Asian imports more expensive, so Americans spend less and Asians more--a natural market adjustment that will create a new equilibrium. Last Thursday, Alan Greenspan added his voice to the "don't worry, be happy" school in a speech to the Council on Foreign Relations.

It's all logical and explains why there has been no crash of the dollar yet. But the world is not run solely by rational economic actions. Politics and psychology play a large role. And that's where worries are justified.

The current arrangement is not one created by market forces. Most Asian currencies do not float freely but have been kept artificially low so that Asian goods can be priced cheaply on global markets. This cannot last forever. Nor can Asian central banks keep accumulating dollars indefinitely, especially if those dollars keep falling in value. The Bank of Japan today has $840 billion in reserves. In the past two years it has lost tens of billions of dollars propping up the dollar. That's why South Korea and Japan have made noises recently about diversifying out of greenbacks--which produced immediate tremors in the market.

Everyone is uneasy with a complete reliance on one currency. The euro now gives the world an important non-dollar asset. …

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