Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Saturday, January 29, 2005

What Is Going to Happen to the U.S. Dollar?

Recently I posted about my concerns with the growing amount of U.S. debt that is being held by foreign central banks:

Perhaps I am missing something, but I cannot imagine why foreign central bankers are holding so much U.S. debt, but maybe they think there are no better options available. Should they ever decide that better options are available, watch out.

Steve Polos of Export Development Canada sees things differently. His take on the decline in the U.S. dollar is that it is returning to where it was a decade or so ago.
During the emerging market crises of 1997-2001 the U.S. dollar rose against almost all currencies, as investors sought a safe haven. From 1996, the last year of relative calm, the dollar rose by about 30% (on a trade-weighted basis) to its peak in early 2002. Global tensions have eased since then, investors have moved their funds back out into the world, and the dollar has returned to about its pre-crisis level.
Steve doesn't see the recent decline as reason for concern, but I wonder if there might be more going on. I would venture that central bank holdings of U.S. debt are much higher now than they were a decade ago. If, so, the observation that the U.S. dollar has "returned" to the value it had in 1996 should provide little comfort since it could go a lot farther.
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