A Dollar and a Dream
Is a strong U.S. dollar really good for the economy and the country? Maybe not.
It's taken for granted that America enjoys a huge economic advantage from the fact that the dollar is the world's global reserve currency, representing more than 60 percent of the money held in central banks around the planet. The euro, a distant second, represents less than 30 percent of reserves. But a new and extremely contrarian report just out from the McKinsey Global Institute calls that old wisdom into question. According to MGI, in 2007 and 2008, the net benefit to the U.S. of the dollar as a reserve currency was a mere $40 billion to $70 billion a year—just 0.3 percent to 0.5 percent of GDP. What's more, the dollar effect actually became negative in 2009, costing America about $5 billion a year in the worst-case scenario.
How could it possibly be a bad thing to be the world's currency of last resort? "It makes the dollar much higher in value than it really should be, and thus hurts both exporters and American companies that compete with importers," says Richard Dobbs, an MGI director and author of the report. In the past it was assumed that the lower borrowing costs resulting from the dollar's favored position, as well as the benefits accrued from the ease of doing business in the world's most liquid currency, would easily offset this problem. Not so, says McKinsey, which believes that as many as 1 million U.S. jobs have been lost due to an overvalued currency, a trend that has been exacerbated this year as jittery investors fled into the dollar as a safe haven.
Indeed, the report suggests that export-oriented American firms might gain ground on European competitors and be in a position to help offset high unemployment if the dollar were allowed to depreciate by about 10 percent. Exchange rates can make or break companies—McKinsey notes that the profits of the Korean powerhouse Samsung are twice that of the top nine Japanese competitors combined, in large part because the Korean currency is so much cheaper than the Japanese.
A weaker dollar is likely coming, whether the U.S. government favors it or not. A survey of global executives found that only 18 percent expect the dollar to be the main global reserve by 2025 (with most expecting a basket currency system to take its place). The good news is that the demise of the dollar may actually end up making America richer.
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Rana Foroohar is the deputy editor in charge of international business and economics coverage for Newsweek. She conceives and edits a weekly section of breaking news stories, features and guest articles. She also writes economic cover stories and opinion pieces, and pens a bi-weekly column on the global economy.
Foroohar oversees Newsweek's team of global correspondents and stringers, directing their reporting on the week's business news. She edits regular columnists such as hedge fund manager Barton Biggs, Morgan Stanley emerging markets head Ruchir Sharma, Yale professor Jeffrey Garten and PIMCO CEO Mohamed El-Erian. She is in charge of economic coverage for Newsweek's annual Davos special issue, which features pieces by world leaders and economic thinkers, and also chairs panel discussions while at the World Economic Forum in Davos.
Prior to taking this New York based position in 2007, Foroohar spent six years as Newsweek's European Economic Correspondent based in London, covering Europe and the Middle East. During this time, she was awarded the German Marshall Fund's Peter R. Weitz Prize for transatlantic reporting. She has also worked as a general editor at Newsweek, a reporter for Forbes magazine, and as a writer and editor at various other national and international publications. Foroohar graduated in 1992 from Barnard College, Columbia University, with a B.A. in English literature. She is a life member of the Council on Foreign Relations.
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