Well, is it the beginning of an end? Many of lesser mortals have asked this question before as well…
Hmm. So in a recent interview to ET, when asked about the future of dollar, Jim O’Neill said -
“….There is no real alternative to the dollar. There will be, whenever the Chinese decide to fully allow the convertibility of the renminbi, but that could be another decade, certainly another 5 years….”
Wait. What?
….another 5 years... ?
So in good times, (don’t get surprised, they were just around, 2 years back), say in 2007, had the same question been asked, one might have said, another 50 years. Investors were all around US treasuries and wanting to purchase dollar. Reason? Trust. The trust that US economy has a consumption model that is net importer of goods from across the globe. So as long as US is consuming, and fundamentally (duh!) the economy is growing, investors would fund the debt of US citizens. And that, I believe, is the reason for strength of dollar.
Many a times, it is observed that dollar being the global medium of exchanges, it is trusted by investors. Or is it? Are we swapping the cause for an effect over here?
Whatever is the causal relationship, bottom line is that the dollar ‘IS’ the currency of globe.
However, the trade deficit for US has risen substantially in recent times whereas the total debt/GDP has reached to a level of approximately 40% as of September, 2009. That, does precisely put a thought in investor’s mind. Is this level of debt risky? In history, developed nations have run those kinds of debts and have come safe out of it (that calls for another post). But then, history
may not
always repeat itself. If so has to happen, where do we turn?
Investors would definitely want to turn to yuan. The way dollar has become a global currency as US drove the growth (directly/indirectly), yuan might have that value for investors, as China seems to be the driver of global growth in future. But then, yuan itself is undervalued. Some estimate, by around 15-20%. Further, it’s a well known fact that this undervalued yuan has supported China’s export and is one of the reasons of China’s huge dollar reserves. Consequently, it is the reason that China has been funding US debt. A catch-22 situation! Maybe. As in, if China revalues yuan, the whole scene will be reversed giving dollar a much needed strength.
So, how does this whole situation translates into our current scenario? Although the view is very simplistic and the situation is not, it has resulted into a stronger Euro, rising oil and record breaking streak of gold. Other most commodities have also shown a well-behaved, upward rising graphs.
It remains to be seen, how political and economical events unfold and if dollar gains the ground or not. However, if China is shrewd enough to tackle political pressure (as it has already illustrated), we might-I repeat, might- be in for a testimony of so called ‘Paradigm Shift’.