KEY POINTS:
Lurking behind the headline-grabbing stories about the credit crunch, the US housing crash and the near-death experiences of the British bank Northern Rock and the American bank Bear Stearns, is the bigger one about the slump in the value of the US dollar.
So steeply has the greenback fallen in value against its main rivals - the euro and the Japanese yen - that economists are talking about the dollar losing its status as the world's reserve currency, a position it has held since 1945.
Commentators have written the dollar's obituary on countless occasions over the past 40 years, principally in the late 1970s and early 1990s, when America's economic performance compared badly with that of Japan or Germany.
So what is different about today? There are two answers: globalisation and the existence of a rival currency in the form of the euro, the currency of choice for an economic bloc that is as big as America's. Germany and Japan by themselves never stood a chance of usurping the dollar because their economies were small compared with that of the US. Today, the eurozone trading bloc is as big as America and set to grow larger as new member states join the EU.
Jeffrey Frankel of Harvard University believes the euro "could surpass the dollar in 10 years".
He says that the reasons for America's longer-term economic decline are well rehearsed, but the most persistent one is its yawning current account deficit, which is plugged by borrowing from creditor nations - particularly China and the oil-rich nations of the Arabian Gulf.
If the dollar continues to lose ground, and it has fallen by 52 per cent against a trade-weighted basket of currencies since 1985, other countries may not find it worthwhile to invest in dollar-denominated assets (which helps to offset the US current account shortfall) whether they be equities, American Government bonds, mortgage-backed securities or even highly rated US corporate debt.
Frankel says the US would lose the "exorbitant privilege" of being able to finance its international deficits easily. But there are also geopolitical implications, which Frankel outlines with brutal clarity.
"In the past, US deficits have been manageable because allies have been willing to pay a financial price to support American global leadership."
However, many analysts expect the dollar to recover some of its lost ground by the end of the year. Paul Ashworth at Capital Economics says: "We don't see a dollar rout from here. Much of the bad news about the credit squeeze and the woes of the banking sector are already factored into the price of the US currency."
Nevertheless, Stephen King, HSBC's chief global economist, is prepared to entertain the notion that the dollar could lose its status as pre-eminent reserve currency, although he is sceptical that the euro will simply supplant it. If the US goes into recession, it's only a matter of time before euroland is dragged down, with the rest of the world.
King says: "It is hard to write off the dollar. Sure, the dollar will bump along the bottom for a while. When you have a banking crisis like this one, it could take a lot to fix it. It may be two or three years of a long, hard slog."
But why would central banks suddenly dump the dollar? That would cut the value of their own substantive dollar assets. Don't forget, the Chinese have $1.5 trillion of foreign reserves.
Still, King accepts that central banks could diversify slowly out of dollars, opting instead for a variety of alternatives, not just the euro.
America's reliance on others to fund its deficits has accelerated the rise of new powers that will one day challenge its hegemony. According to this thesis, the US becomes, in part, the victim of globalisation, rather than its champion.
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