DAVOS, Switzerland—Global economic experts meeting in Switzerland this week discounted the rumored impending death of the dollar as the world's anchor currency, saying any wholesale stampede away from the greenback is highly unlikely.
Many analysts have issued worst-case scenarios warning that foreign investors and governments—soured by soaring U.S. federal budget and trade deficits—might dump their dollar assets and shift their capital into euros, yen or other currencies. At the extreme, such a trend could trigger a collapse of the dollar and perhaps even the global financial system.
But at the annual World Economic Forum in Davos this week, leaders in global finance suggested that fear of the dollar's impending death is greatly exaggerated. While U.S. budget and trade deficits are problematic and need to be reduced, these global financiers for the most part think that will happen in an orderly fashion.
Takatoshi Ito, a finance expert at the University of Tokyo, said Asian investors, on whom the U.S. government greatly depends to finance its huge budget deficit, aren't going to turn against the American currency.
"That is very unlikely. There are lots of assets in the U.S. that the rest of the world is willing to buy, and it's not just U.S. bonds, but assets in general," he said in an interview. "So I don't see this sudden turn-off by the rest of the world."
Jacob Frenkel, the vice chairman of insurance giant American International Group and a former head of the Bank of Israel, agreed.
"I don't see a high probability for the dollar losing the leading role," he said. The United States remains the safest place to invest because of clear rules, transparent regulation and the wide range of options, he said.
The dollar's recent erosion in value vs. other currencies has prompted the doomsday scenarios. Since 2002, the dollar has fallen 33 percent against the European Union's common currency, the euro, and 24 percent against Japan's yen.
The U.S. budget and trade deficits are at the root of the dollar's decline. Some global investors worry how long Americans can continue to live beyond their means, and pressure is growing on America to control its spending and reduce its deficits.
The federal budget deficit will hit a record $427 billion this fiscal year, the White House projects. The United States also posted a projected $600 billion trade deficit for 2004, $200 billion of it with China.
To be sure, some analysts think that a falling dollar still could trigger a global crisis.
"The United States has to import about $5 billion in foreign capital every day to finance our current-account deficit," warned C. Fred Bergsten, the director of the Institute for International Economics, a Washington research center. The current account measures the flow of trade and finance into and out of the U.S. economy.
Foreigners, mostly the central banks of Japan and China, are still buying Treasury bills, financing U.S. spending. But if the deficits don't improve, investors could begin demanding higher interest rates to offset their risks, Bergsten said.
Higher interest rates would reduce spending by U.S. consumers. If they got high enough, they could trigger a recession, causing financial markets and foreign governments to lose confidence in the United States, dump their dollar-denominated assets to cut their losses and send the dollar tumbling even further.
It seems improbable, but not impossible, according to Peter Sutherland, the chairman of investment giant Goldman Sachs International.
"We are in uncharted seas," he said. "It's impossible to say what is going to happen."
Although the dollar has skidded before, it hasn't had a real rival since the 1970s, when it replaced the gold standard as the anchor currency for the global economy. Europe's successful launch of the euro in 2002 now gives investors a serious option.
"Two years ago, you had only 12 percent (of global central bank reserves) in euros, and now we are 35 percent in euros," said Clara Gaymard, France's ambassador at large for international investment. "It really shows that the euro is maturing as a currency."
The Bush administration counters that critics are ignoring U.S. economic growth that's projected to be around 3 percent this year, stronger than Europe or Japan. Administration defenders say critics also are overlooking the fact that American consumers' purchases of imported products benefit the global economy.
"It's a good economic situation that is better than it has been in decades," said Treasury Undersecretary John Taylor, who's at the Davos conference. "There is no reason to be complacent. We are addressing issues that are there."
Washington is pressuring China to lower the fixed rate at which its currency, the yuan, trades against the dollar. The world's second-largest economy, China accounts for a third of the U.S. trade deficit. Resetting the currency-exchange rate would help correct the trade imbalance by making Chinese imports more expensive for Americans and U.S. products cheaper in China.
For now, big players in American finance and commerce don't seem overly concerned about the dollar's slide.
"The dollar and the current-account deficit are self-correcting. As the dollar weakens, the current-account deficit will improve," John Thain, the chief executive officer of the New York Stock Exchange, told Knight Ridder. "I think the budget deficit is a more difficult issue, but certainly one the administration is addressing."
Thomas J. Donohue, the head of the U.S. Chamber of Commerce, said investors worried about the budget deficit should know that American public debt as a percentage of the total economy remains considerably lower than the public's debt in Germany, France or Japan, and U.S. employment is far healthier.
"This is a great economy," Donohue said.
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(c) 2005, Knight Ridder/Tribune Information Services.
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