Greenback caught in G20’s crosshairs

Fairfax Media

UNDER PRESSURE: A pledge from Group of 20 leaders to bring the global economy back into balance is not seen as good for US the dollar in the long run.

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A pledge from Group of 20 leaders to bring the global economy back into balance is not seen as good for US the dollar in the long run, underscoring its anemic performance in recent weeks.

Short-term reactions in other markets to the G20 meeting of rich and emerging economies in Pittsburgh this past week will be muted, analysts say, but bank stocks and energy prices could also be hurt over a longer period of time by G20 actions.

Yet the dollar is seen as most susceptible to damage after some at the G20 meeting questioned the stability of the dollar in light of its status as the world's reserve currency.

The dollar rose last week, in part because of equity market weakness, but it has fallen 4.3 percent this quarter against a basket of major currencies.

The dollar's weakness of late has not come because of U.S. economic weakness, but because of emergent recovery around the world. Investors have used the dollar as a funding currency to buy riskier assets around the world.

The U.S. economy is rebounding, largely due to increased borrowing and government stimulus, while world leaders expressed concern that these trends cannot be sustained in the long term.

They say an economic rebalancing is needed, with the United States saving more and export giant China consuming more to support its growth.

"The real problem is the world needs a huge consumer and the U.S. has been basically doing it for decades and it's spent," said David Gilmore, partner at FX Analytics in Essex, Connecticut.

World Bank President Robert Zoellick said the United States should not take the dollar's status as the key global reserve currency for granted because other options are emerging.

In excerpts released on Sunday from a speech he is to deliver on Monday, Zoellick said global economic forces were shifting and it was time now to prepare for the fact that growth will come from multiple sources.

Aside from the dollar, an agreement by the world's largest economies to phase out subsidies on oil and other carbon dioxide-spewing fossil fuels over the "medium term" in an effort to fight global warming will not likely hit energy markets in the short-term.

Longer-term, however, the move could cut fuel demand in emerging markets, weighing on energy prices.

While bank stocks should shrug off the G20 reforms in the short term, bank profits could be limited and shares pressured over the long-term if regulators enact onerous capital requirements.

The Securities Industry and Financial Markets Association, Wall Street's lobbyist, said late Friday: "Taken together, these reforms could negatively impact investors, capital flows and economic growth and job creation during a period of global economic vulnerability."

BALANCING ACT

World leaders also promised to keep emergency economic support in place until a recovery is at hand, providing some relief for foreign currencies and assuring investors who were worried about a quick exit from quantitative easing.

But the pledge is a double-edged sword for the dollar, which has been hurt by extremely low interest rates and the glut of dollars in the system.

The recession has already triggered some rebalancing, with U.S. consumers cutting spending while China is spending about $600 billion to stimulate its economy and make it less dependent on exports.

"So what country is going to come in and fill (the U.S.') shoes?" Gilmore asked.

Analysts were quick to note that without concrete steps, the pledge amounts to lip service and it is unlikely any countries would bow to G20-imposed rules on how to run their domestic economies.

Even so, such a plan would be a marked shift and could signal a longer-term move away from the dollar.

"In the long run, I think they want another reserve currency, whether it's the Special Drawing Rights or the Chinese yuan," said Kevin Chau, currency strategist at research firm IDEAglobal in New York.

"For any country's currency to gain that kind of credibility and trust, it would take years of development," he said.

That said, the greenback fell to a fresh low against the euro and dropped below the key 90 yen-per-dollar level this week.

- Reuters