The accelerated decline in recent months of the greenback has been seen as a necessary ingredient in the search to create a post-crisis economy that is less prone to financial catastrophe. It has forced countries such as Canada, Japan and the European Union to diversify their trades, which could potentially lead to a stronger, wealthier global economy in the long-run.
Prior to the recent economic crisis, countries were overly reliant on U.S. consumers, who created demand (now shown to be unsteady and unreliable) for goods produced in other developed countries through their debt-fuelled spending. This situation was largely facilitated by favourable exchange rates for countries outside of the U.S. which were sometimes artificially created through the actions of foreign central banks. Now, as the world tries to recover and emerge as a stronger global economy, policy makers in the G20 are attempting to diversify the demand for their exports to Asia and elsewhere. This movement and rebalancing of global polices has only been facilitated by a weaker U.S. dollar.
When the world economy appeared on the verge of collapse last autumn, investors largely moved their funds into U.S. government securities, seeking safety in a legal tender that has been accepted almost everywhere and backed by the government of the world’s largest economy. Although, there was no support from the U.S. government, only an economy drowning in debt and a willingness to take on more risk. This panic situation drove up the value of the U.S. dollar against other major currencies.
A year later as we find ourselves now, factors such as the record budget deficit, near zero benchmark interest rates, and forecasts for slow growth are all causing investors to sell their U.S. dollars to buy currencies with much better prospects. Furthermore, investors are buying primarily European debt and currencies closely tied to commodities, such as the Australian dollar.
Increased diversification among investors and a return to confidence in the prospects for countries outside of the U.S. is leading to the strength of currencies around the world. For instance, the Canadian dollar topped US$0.97 in October 2009 and continues to remain strong around US$0.96, prompting some analysts to conclude that it will be at par within the next few months. This may be viewed as a concern to Prime Minister Stephen Harper and the Bank of Canada because a higher Loonie makes Canadian goods more expensive in international markets and threatens a return to steady GDP growth in Canada. Despite the obvious incentive for the Bank of Canada to intervene in the currency markets, policy makers agreed last year at the G20 Summit in Pittsburgh to adopt a common framework for more durable economic growth. Any move to intervene in the currency markets would be viewed negatively by foreign governments as a self-serving and counterproductive policy. The G20 leaders believe that this new framework will prevent a replay of the worst crisis since the Great Depression and will help to reshape the global economy into something that is less prone to a financial meltdown or adverse developments in the U.S. economy.
Only 2010 will tell if these growing pains were necessary and if they fostered a wealthier, stronger global economy. However, as the old saying goes, something good always comes out of a something bad!