The Slow Fall of The Greenback

Immigrants to New York used to be greeted with signs like "Help Wanted: No Irish Need Apply." But these days, newcomers from Dublin are more likely to be mobbed by luxury property developers trying to hawk them $1 million condos (a handful of new buildings in the city are marketed mainly to rich Irish). Manhattan, like other posh areas of America, is now full of homes meant for foreigners. One in five American real estate agents sold a house to an expatriate last year. The reason is obvious: from Rio to Riyad, dollar assets are a bargain.

The shift, which has been coming for several years now and will be much discussed at the World Economic Forum in Davos this week, is seismic. Since the end of World War II, the dollar's unique role as the de facto international currency has afforded Americans a tremendously privileged place in the world. We filled most of the seats on transatlantic flights, and bought second homes abroad. Our currency was prized by central banks. Countries pegged their monies to the dollar. Commodities were priced in dollars. The strength of the greenback, and of the economy, underpinned U.S. global hegemony in politics and culture. Big American banks like Citibank used to fund Third World governments—now those governments are buying Citibank on the cheap.

Clearly, times have changed. The dollar—along with America's economic place in the world—has been on a well-documented downward spiral since 2002. Back then, a euro was worth 86 cents. Today, it buys $1.46. Of course, the euro's relative youth makes talk of "historic lows" easy to dismiss. More telling is that the U.S. Dollar Index, a futures contract reflecting the dollar's strength against six other major trading currencies, hit the lowest mark in its 35-year history just before Christmas.

The shift will of course have major ramifications. Countries are beginning to de-link their currencies from the dollar, as inflationary pressures make it difficult to implement effective local monetary policy. Large global creditors like the Chinese have announced their intent to scale back on dollar reserves. European Central Bank head Jean-Claude Trichet is grousing about "brutal" movements in the dollar-euro exchange rate slashing profits at Europe's biggest firms. Just last week, Airbus CEO Tom Enders warned that a weak dollar threatened the long-term existence of the Continental aerospace giant. Japan's new Prime Minister Yasuo Fukada worries that the plunging greenback will bring back deflation. And OPEC is studying the possibility of pricing oil in euros—a move that would not only amount to a vote of no confidence from some of America's largest creditors, but would also make energy much more expensive for the United States, compounding the economic troubles which led to a weak dollar in the first place.

Venuezuelan president and Bush-basher Hugo Chávez recently gloated, "The empire of the dollar is crumbling." But that's not quite right. The majority of the world's financial assets and central bank reserves are still held in dollars. It will take years for the euro to become a real rival; the renminbi will rise over decades. Still, what's clear is that we have entered a new era. The United States can no longer rule the world on credit. A rebalancing has begun (graphic next page). Enter the new dollar order.