The Financial Landscape: Dollar Losing Favor, Economy Losing Steam


A roundup of news from around the world of finance:

Reservations About the Dollar:
In potentially ominous long-term news for the U.S. economy, the Financial Times reports that a survey of central bank managers predicts that "dollar will lose its status as the global reserve currency over the next 25 years." Having its currency serve in the role of global reserve allows the U.S. to borrow money at a better rate, since there is always greater demand for U.S. dollars than for other currencies.

This is the first year that the survey conducted by Swiss investment bank UBS (UBS) has indicated that more than half of central bank reserve managers expect the dollar to lose its privileged status. UBS chief economist Larry Hatheway attributes the change to "great concern... around the financial trajectory that the U.S. is on" (unrestrained spending, the Federal Reserve's enormous bond-buying programs). The FT notes that the dollar "has slid 5 percent so far this year, and is trading close to its lowest ever level against a basket of the world's major currencies."

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Such a basket is just what the managers polled by UBS expect to replace the dollar. World Bank President Robert Zoellick suggested such a system last year, proposing a portfolio that would include the dollar, euro, yen, pound and renminbi, as well as gold. In fact, the use of a single national currency as an international reserve currency has been recognized as problematic since before the dollar's elevation to that status: Prior to the Bretton Woods conference of 1944, which established the postwar monetary order, economic luminary John Maynard Keynes proposed a supranational currency, called the bancor, for use in world trade. In a March 2009 speech on the root cause of the financial crisis, the governor of the People's Bank of China expressed admiration for Keynes' idea, which the U.S. blocked at Bretton Woods.

Housing Market Troubles:
In a further sign that housing woes are impeding the U.S. economic recovery, the S&P/Case-Shiller 20-City Index fell 4% in the 12 months that ended April 2011 -- the biggest decline in property values since November 2009, according to Bloomberg. On a minor positive note, the drop from March to April -- 0.1% on a seasonally adjusted basis -- represents the smallest dip since July 2010.

A Worried World:
Finally, U.S. consumer confidence fell to a seven-month low in June. Global investor confidence declined as well during the same period, including among North American institutional investors.