The resilience of the dollar during the financial crisis
If the crisis is primarily American, she paradoxically strengthened the role of the dollar as a safe haven, given the preference of international economic actors for the dollar. These are the other countries, particularly Asian countries, which have strengthened the exorbitant privilege of the dollar. On the one hand, since the Asian crisis of 1997-1998, these countries have accumulated large dollar reserves to guard against the volatility of short-term capital. On the other hand, the accumulation of reserves has allowed them to maintain their undervalued exchange rate. The question then is: why do they target the dollar? Why not the euro or the yen? According to an economist, this is still one of the privileges of the dominant currency. We use the dollar because others do the same. Just stabilize its currency against the dollar for it to be stable vis-à-vis other currencies. Added to this is the high liquidity of the U.S. bond market, itself partly explained by the increased use of the dollar by other countries. But there is a downside. By accumulating dollars, these countries have funded abnormally low the U.S. current account deficit and hence the excess consumption and that of the U.S. government, the famous twin deficits. Leverage effects induced by these flows partly explain the collapse of the international financial system. Failure to pass the dollar, it should at least find him a competitor, like a trader who diversifies its portfolio to reduce risk.
With the crisis, logic would dictate that the dollar loses its status as an international currency or failing that operators are diversifying their currency baskets. The reasons are not lacking. The dashboard of the U.S. economy is not good: the twin deficits, high debt and temptation to use inflation to ease this via quantitative easing – quantitative easing – etc. All these factors contribute to the weakening of dollar. But it is not. The dollar remains the leading international currency. The reason is that it is not the absolute health of the U.S. economy that determines the position of the dollar, but its relative health. However, America is wrong but its immediate competitors are no better. The United Kingdom and Switzerland are small economies whose currencies are not eligible to occupy the first place. Japan is a large economy but for reasons of competitiveness, the government prefers to limit the expansion of the yen. Indeed, Japan has always favored a strategy of growth based on exports. This requires two conditions limit the internationalization of its currency in order to control its course and maintain undervalued for trade surpluses. Economic health also, Japan is not better off than the United States since the bursting of its real estate bubble in the early 1990s.
China emerges as an economic power but its banking and financial sector remains too fragile to see the Yuan to play an important role. Remember the events of the dollar – being an economic power is a necessary but not sufficient for its currency can hold the upper hand: the existence of a liquid financial market and developed is paramount. It remains one potential competitor to the dollar, the euro. The euro area has many assets to internationalize its currency. This is a great open economy; it has a developed financial market, a central bank leading, etc… But Europe also has major handicaps: its growth is sluggish, aging population, its institutions too complex and last but not least, the euro is a currency without a state.