Speaking in 2010, Dr. Robert Mundell, the Nobel Laureate and iconoclastic dean of international monetary economics, made an intriguing observation.
The global economy was like a solar system, he said. And for many decades, due to the overwhelming size of American GDP, the US dollar had been like the sun, the behemoth at the center whose gravity dominated and defined the system.
The dollar’s centrality was a fact, despite the supposed monetary independence nations attained in the early 1970s, when the Bretton Woods system of pegged exchange rates broke apart and currencies were allowed to float relative to one another.
The truth, Mundell said, was that international trade required a common monetary standard and unit of account. So, for decades, even after the early 1970s, the US dollar had served that role, with world markets pricing goods in dollars, using the dollar as the primary reserve currency, and struggling to keep their exchange rates relatively stable in relation to it.
But – and this was the intriguing point – the system changed fundamentally in 1999, when Europe unified the GDP power of 11 (now expanded to 19) nations under a new common currency, the euro. The European Union represented an economic area as large as the US.
“The euro,” Mundell said, “drove a spike – a rivet – between the core of the world economy, which has always been associated with the dollar area. Now there’s another core – a competing core – it’s the euro area… If you have wild fluctuations like we’ve had in the past between the dollar and the euro rate, you cannot have a global monetary order.”
In the global system today, the dollar and the euro together represent about 40% of world GDP. When nations with exchange rate links to one of the two mega-currencies are added – 13 nations including China, the Persian Gulf states, Hong Kong, parts of South America and Africa are tied to the dollar; 22 nations, mainly in Europe and Africa, are linked to the euro – the combined dollar-euro area is more like two-thirds of the world economy.
The combined size of the dollar and euro areas makes their exchange rate the most important price in the world, Mundell said. It sets global monetary conditions and impacts trade and capital flows.
With this in mind, consider the size and frequency of dollar’s swings versus the euro over the last 15 years.
This level of instability – dictated largely by the cycles of easing by the Federal Reserve – has contributed to financial instability and malaise on both sides of the Atlantic and across the world. How do businesses make long-term investments in either currency area, or in markets tied to – or selling in – either area, with this level of seesawing?
The dollar-euro rate correlates to moves in other crucial global prices, starting with oil. No, correlation does not prove causation. But it’s no coincidence either. Wall Street analysts routinely use the dollar’s swings to explain moves in commodity prices. When the dollar is strong, as it is now, commodity prices tend to fall, as they have in the last two years.
The fluctuations in the dollar-euro exchange rate have had a tremendous destabilizing impact on blue-collar industries. Oil drilling and refining, mining, trucking, taxis, farming, and manufacturing – industries dependent on commodity prices.
The fluctuations also unsettle foreign nations whose economies depend on commodity exports, and countries that owe dollar- or euro-denominated debts.
When finance ministers gather this month for the International Monetary Fund –World Bank spring meetings in Washington, DC, they should consider two questions: Is such instability between the two largest world currencies healthy? If not, what can be done to stabilize the system?
Three developments suggest the possibility for a breakthrough:
- Eurozone inflation and GDP have accelerated recently, improving the prospect of greater harmony between US and the Eurozone policy.
- European Central Bank President Mario Draghi last year surprised observers by calling for greater monetary policy coordination among the major economies.
- President Trump has stated repeatedly that he regards the soaring dollar as a threat to US growth.
These factors suggest rising openness to a more stable international currency order, perhaps along the lines of the Plaza Accord, which the Reagan Administration negotiated in 1985 to lower and stabilize the dollar.
A more stable dollar-euro rate, with the Chinese already pegged to the dollar, would restore the core at the heart of the world financial system and would remove a major barrier to global economic growth.
The world urgently need an alternative to the US dollar. The other world reserve currencies are connected to western economies, EUR, GBP, and YEN. The Yuan (Renminbi) is not floating, but the Chinese gradually make it more available. China/Russia is doing more business using currency swaps and SDR. China should pursue the idea of creating a Gold secured Yuan.
The volatile USD dollar is far too high due to the high demand for a reserve currency. The strong dollar damage US exports and it is FIAT currency that will stay alive if the market think the nearly bankrupt USA can pay their liabilities. Another reason for the volatility is the volume of financial instruments like derivate and options that is purely speculative investments. Alternatives to SWIFT, Visa and MasterCard must be found, so if there will be a financial “war”; there will be no economic meltdown.
The problem rests with the system itself which is ruled by the finance capitalist class. Each one of the wild swings in the value of the Euro and the Dollar represent the work of hedge funds and other financial organizations controlling tens of trillions of Dollars as they speculate in the foreign currency markets. This is a parasitical function which serves no constructive purpose in economic affairs. The solution is to socialize finance. A method should be found to liquidate hedge funds and such parasitical entities. Trading in foreign currency should be limited to those functions necessary to support commerce, and whatever adjustments central banks, under national control and not the control of finance capital, need to make to facilitate the smooth workings of the global economic system.
US #dollar as global currency is here to stay but how strong she would be depends on challenging situation with major glabal trading partners like China and Russia being a technologically advanced country.Major global resoueses like oil,gold uraniums are still under the dictares of US Corporations but finding stiff competition with BRICKS Countries that are not trading in us dollars.Simply printing us dollars is not the option nor increasing us Debt exponancially in present situation.US President was peobably in right track to get her funance system in order but she seems to be off track due to her sudden shift of foreign policy that wont work against her mighty adversaries!
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