Why The U.S. Dollar Is King

The currency game is a relative game.

America certainly has significant financial challenges that need to be dealt with, but it offers many attributes that make the dollar the premier reserve currency of the world.

Attributes such as political stability, deep and broad liquidity, vibrant capital markets, openness, and free convertibility and acceptance of the U.S. dollar worldwide more than offset our debt issue.

For my friends at the IMF who are considering adding the Chinese yuan to the SDR basket, thereby indirectly recognizing it as a reserve currency: Don’t do it.

On the issue of liquidity, the Chinese yuan is a long way from being convertible across the board.

Chinese exporters who receive U.S. dollars are forced to turn them over to the central bank (this is how China built its $4 trillion in reserves). Citizens can’t take it out of the country. And it isn’t accepted as legal tender anywhere outside of China.

And it’s going to be a long time before China allows its currency to freely float, because the whole system is built on tightly controlling the yuan’s value. If the yuan strengthened 15% in six months, millions of exporters – already on razor-thin margins – would go bust.

In addition, China’s weaknesses as a global safe haven are glaringly obvious. For example, all of its strategic industries are firmly in state hands and its judicial system is anything but independent.

There’s also significant political risk. China’s decision-making process is anything but transparent. In addition, its more aggressive posture regarding territorial disputes with Japan and some Southeast Asian nations is a bit disquieting.

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To highlight all of this, let me tell you a story I heard from a friend about Myanmar, a country that’s very close to China both economically and politically.

Apparently, the Myanmar central bank has canceled foreign-exchange licenses issued to thousands of businesses including hotels, restaurants, and supermarkets in a bid to curb the growing use of U.S. dollars in the economy as the domestic currency, the kyat, has lost considerable value.

This move came three weeks before Myanmar holds elections on November 8. Businesses will have to give up their licenses and will no longer be able to trade in U.S. dollars.

Clearly, the preference of many businesses to accept the dollar over the local currency or the yuan speaks volumes about the dollar’s enduring acceptance.

Economic history indicates that no country has ever achieved greatness, nor maintained it, by debasing its currency.

Have you ever heard of a country in deep economic trouble because of a strong currency? The value of a nation’s currency is a reflection of the perceived value of the country in the global marketplace.

Which is why I believe a strong and stable dollar policy enhances U.S. competitiveness, job growth, standard of living, capital investment, share prices, and our ability to finance our public debt.

I’ll admit that a weaker U.S. dollar would make it easier for U.S. exporters to sell their goods and services overseas, but this is offset by several factors:

1. A weaker dollar translates into a cut in the real spending power of American consumers; in effect, a reduction in real income.

1. A weaker dollar also diminishes the role of the dollar as the world’s reserve currency. Why should investors and central banks around the world invest in U.S. assets when its value is steadily declining?

1. During a time when the American consumer is cutting back, attracting international capital investment by private companies will be crucial in financing innovation, entrepreneurship, and badly needed infrastructure, which will help spur economic growth and employment.

With interest rates at or near zero, we need every incentive possible to attract the capital necessary to finance our public debt and infrastructure needs.

1. A weak dollar also undermines American jobs and industry since American companies would have an incentive to borrow in dollars and use the proceeds to invest in overseas plants and equipment. A weakening dollar encourages capital outflows.

1. Lastly, a weaker dollar is inflationary, since it increases the cost of imports. Just look back to the U.S. economy during the 1970s – ugly stagflation and markets going sideways year after year.

The value of a nation’s currency is a true reflection of the market value of the country in the global marketplace. And maintaining the value of the U.S. dollar is in the national interest, as well as the best interests of American consumers, businesses, and investors.

Good investing,

Written By: Wall Street Daily