America faces a diplomatic penalty as the dollar dwindles
Posted by ecoshift on January 2, 2008
FT.com – America faces a diplomatic penalty as the dollar dwindles
By Daniel Dombey
Published: December 27 2007 17:41
At the end of a year in which the dollar has endured a marked decline against other currencies, an unsettling question is beginning to be voiced: can the troubles of the US currency be confined to the financial world or are they set to undermine Washington’s place on the international stage?
“This is the neglected dimension of the dollar’s decline,” says Flynt Leverett, a former senior National Security Council official under President George W. Bush. “What has been said about the fall of the dollar is almost all couched in economic terms. But currency politics is very, very powerful and is part of what has made the US a hegemon for so long, like Britain before it.”
Along with some other commentators, Mr Leverett brackets the dollar’s recent fragility with related phenomena, such as the greater international use of rival currencies. He argues that if such trends continue, the result will be costly for the US. While a lower dollar is associated with greater financing costs for America’s twin current account and budget deficits, he says, currency movements can be determined by politics as well as economics – and the US security could be damaged if America’s creditor nations move against the dollar.
“Americans will certainly find global hegemony a lot more expensive if the dollar falls off its perch,” adds Kenneth Rogoff, former chief economist of the International Monetary Fund, in an article published this month.
He maintains that the US has been fortunate to be able to use the huge low-interest dollar holdings of the central banks of China and Japan to finance higher return investments elsewhere, “but between the sub-prime US mortgage crisis and the dollar’s ongoing decline, America’s exorbitant privilege now looks a bit shaky . . . American voters, who are famously loath to increase taxes, might start thinking a lot harder about the real economic costs of their country’s superpower status.” …