For an American living abroad, the most striking aspect of the current financial crisis is what it has done to the dollar. Stock markets and commodities are crashing as America leads the world into a recession, so you might expect the U.S. currency to take a pounding as well. But instead, it has soared. This week, the dollar is king.
There are technical reasons why the dollar is rising in value against the euro, the British pound and a string of other currencies (aside from the yen, which is also strengthening). Investors have been “deleveraging†and liquidating assets in emerging markets. But more fundamentally, it's a matter of trust. Most people see the dollar as a safe haven in a stormy world.
Why this is so is an interesting question. After all, the world blames America for the sub-prime lending and dodgy banking practices that created the crisis. Some European governments, led by France, are now urging the creation of a new, multi-currency, international monetary system to replace the reign of the dollar.
Russian commentators even jumped to the conclusion that we are witnessing the decline of American capitalism and the time has come to consign the dollar to the trash bin of history. And yet, when the Russian government poured billions of roubles into the country's banks to keep them afloat, the first thing Russian bankers did was convert the roubles into dollars.
The strength of the dollar is a reflection of the strength of America. It is still the world's strongest economy, the greatest military power, and the leading cultural influence. America's foreign policies – especially in the Middle East – may have tarnished its image and stirred up anti-America sentiment around the world. But the Crash of 2008, for all the damage it may do, will also help put things in perspective. When the chips are down, the United States is a safe bet.
That cannot be said of America's rivals and enemies, especially those that depend on oil exports. Look at Iran, which needs a price of around $95 a barrel to balance its budget. President Mahmoud Ahmadinejad, a populist who won election three years ago with promises to spread the oil wealth to every home in the country, had plenty of money to give away when oil reached $150. Now, with oil at less than half that price, he's in trouble and can no longer be sure of re-election.
Venezuela's President Hugo Chavez faces similar problems. Even Russia, despite its new wealth, is burning through its foreign currency reserves to prop up businesses and banks, and needs a price of $70 a barrel to balance its budget. Plans to modernize Russia's armed forces may have to be put on hold.
The Organization of Oil Exporting Countries is going through the usual motions of announcing cuts in production targets to prop up the price, but the market is not likely to take it seriously. OPEC members can be expected to cheat on quotas in an effort to win as much market share as possible, so the price is not likely to rise much. That's bad news for the oil producers and good news for importers, especially the United States. Since oil is priced in dollars, Americans may end up getting a lot more bang for their buck at the gas pump.
The world the next American president will inherit may not look the same as the troubled world at the end of the Bush administration. There is a good chance that the United States, after leading the world into recession, will lead it back out. Economists believe the inherent strength of the American economy makes it better able to weather the storm than Europe, where the recession is likely to be more severe. As things stand today, the euro no longer looks like a serious rival to the dollar.
