Since early October 2009, the U.S. dollar, measured against a basket of currencies of other major countries, fell to a new low below that reached during the financial tsunami in 2008. This means that the trend of a weakening dollar has re-intensified and has become a general tendency that has been out of control since the start of the 21st century. Although the Obama government publicly opposes a weaker dollar, it appears ready to silently accept such a frustrating weak dollar reality. Nevertheless, many trading partners who use dollars are making efforts to move in the opposite direction. The monetary authorities of these trading partners in Asia, such as South Korea, Taiwan, the Philippines, Thailand, Indonesia, and Hong Kong, intervene in the foreign exchange markets in order to try to delay the momentum of the U.S. dollar falling against local currencies.* These monetary authorities are concerned that a falling dollar may harm their export-driven economy. So Mrs. Suchada Kirakul, the Assistant Governor, Monetary Policy Group, Bank of Thailand, said that, compared with Thailand's economic fundamentals, the pace of the baht's appreciation has been a bit too rapid. However, this seems to be an excellent application for the G20’s new consensus - "rebalancing the global economy."

A. Does a "Strong Dollar" Recklessly Mislead the World?

The strong euro is casting a shadow that is hard to avoid, as it hampers exports, in the most developed regions - the euro area. The European Central Bank President Jean-Claude Trichet said on October 8, 2009, that, under the unstable conditions of the current economy, it is very important for the United States to call for a "strong dollar" policy. Since Obama took office on January 20, 2009, the dollar has fallen by more than 11.9% against a basket of international currencies. On October 8, it fell again by 0.7%, the same day when it was reported that the Japanese yen had an exchange rate of ¥88.48 to USD 1. In recent years, the Chinese yuan has appreciated by more than 22% against the US dollar. The depreciation of the dollar has reached its lowest level since September 2008. Will the dollar depreciate progressively or plummet dramatically?

The United States Government and the U.S. Treasury Department did not make any comment or speech on this new round of falling dollar. After the G20 finance ministers’ meeting in Istanbul, U.S. Treasury Secretary Timothy Geithner said: "Continuing to have a strong dollar is very important for the United States." But whether merely "important" or very "important," the statement was similar to the high-profile calls for a "strong dollar" that the Bush Government made during its eight years in power and yet the dollar was never "strong" for a single day. What necessary measures will the United States take to protect the strength of the dollar to ensure the confidence of the world?

But apart from the president of the European Central Bank Jean-Claude Trichet, no one seemed to have taken this remark seriously. Vice Chairman Jonathan Clark of the hedge fund FX Concepts in New York, which has assets sized 8 billion dollars, said that the United States is willing to discuss a strong dollar, but is unwilling to take any practical action. He said that if you do not have action, then it is just lip service and we can only stare at the dollar dropping day after day.

B. Who Can Make the Dollar Bottom Out and Stay Firm?

At present, there is no indication that the continued weakness of the dollar has sounded an alarm for the U.S. government, unless the dollar slide escalates into a catastrophe which destroys market confidence. Such a possibility has not yet materialized; without it, it is impossible for the United States Government to change its current position. At present, the weaker dollar may weaken the U.S. economic recovery as well as make all goods in overseas sales cheaper, which could further boost the U.S. export industries. While the United States is experiencing the stabilization of the financial tsunami and economic weakness, this is a favorable strategic opportunity that is rare in American history. Cheaper U.S. goods abroad may help to achieve the long-sought rebalancing of the global economy, namely by letting the United States increase exports, while China and other countries increase imports. The United States released the latest new theory in the G20 meeting by saying that "Seeking the rebalance of the global economy" is a necessary and beneficial global process. Simply put, the dollar slide is caused by the more than 1 trillion large-scale U.S. deficit in the past 10 years and only printing money can fill that massive deficit. This, on the other hand, has heavily diluted the value of the dollar.  The dollar and U.S. policy are aiming at seeking their global benefits - this of course has left all the countries in the lurch to shoulder the huge task of global "balance" against the dollar.

While this statement appears to be contradictory to the position of a strong dollar (less exports) on the part of the United States government officials, Obama and other government officials say that the United States needs to reduce its dependence on domestic consumption (less imports). Although they would not say that this means a weaker dollar (more exports), many traders and economists regard the weak dollar as the root and condition for realizing an economical rebalance through internal and external adjustments. This is one of the root factors why few people believe the claim of a strong dollar.

Despite the sharp decline in the dollar, the U.S. stock market is booming. The United States in fact has a greater gain from the dollar decline: The research and analysis made by the companies that form the composites of the U.S. Standard & Poor's 500-stock index (S&P 500 Index) show that 40% of their pre-tax profits come from outside the United States. A weak dollar can push up the U.S. stock market and promotes U.S. domestic consumption. Meanwhile, the U.S. Department of the Treasury's borrowing rate has remained stable. As long as this situation is maintained and the dollar decline is gradual rather than a disaster that destroys confidence, the Obama government officials will probably continue reciting the "strong dollar" mantra while acquiescing the non-action regarding the dollar decline. No one even mentioned the dollar fall in the communiqué issued after the G20 meeting in Istanbul.

C. Is the Dollar Decline the Only Way to Stop the Financial Tsunami?

If the weak dollar is constantly pushing up the U.S. market and consumer expectations of the rise of the inflation rate after the financial tsunami, then this will make the Federal Reserve not interfere with the concern of the dollar fall. Since the start of the 21st century, from the Bush administration to the Obama administration, for more than nine years the dollar has continued its slide non-stop while the U.S. economy has experienced huge ups and downs. Is this telling the world an invisible truth that it does not matter whether the U.S. economy is bad, or better, that the depreciation of the dollar has been continuing non-stop?

So far this does not seem to be a common expectation. But the gold price movement which sometimes is seen as harbinger of inflation has reached a record high this week, rising to over 1056 dollars an ounce. The market movement in one direction often runs overboard. The danger is that the market pressure due to the dollar's outlook may impose more active measures to boost the dollar. The chief market strategist Ashraf Laidi of the Currency Management Corporation (CMC Markets) in London said that, although the market is still not really panicking, it is in a state of deserving people’s serious concern.

Although the daily ups and downs of the dollar are the main focus of attention of the traders, they are not the concerns of some policy-makers. Dallas Federal Reserve Bank President Richard Fisher said that, like any other market, the foreign exchange market also loves going to extremes; he cautions not to read too much into short-term fluctuations of the market. He said that if we can make the U.S. economy recover by not taking the risk of neglecting or being too concerned about a stable dollar, then the dollar will be all right. Some scholars offer a deeper analysis and state that due to the large number of issued dollars, other countries outside the United States that use the dollar have also borne the burden.

D. Will the Dollar Stop Falling in the Future?

In Washington, the dollar weakness has been seen as the result of an easing of the current financial tsunami. The crisis has resulted in global investors buying U.S. Treasury bonds as a safe haven, thereby pushing up the dollar for a while. Now, some investors are selling dollars and buying other assets. In addition, some economies have picked up speed faster than other economies. For example, the Australia Reserve Bank raised interest rates earlier this week, as the country's economy has been revitalized. The Australian dollar against the U.S. dollar rose Thursday to a 14-month high. Since the Australian central bank announced its interest rate increase, the Australian dollar has risen 3.6%.

A country raises interest rates because this can help attract global investment and tends to play the role of boosting the exchange rate of the local currency. While the Federal Reserve continues to keep the U.S. short-term interest rates at record near-zero levels, the raise of interest rates by another country’s central bank is likely to push up that country's currency against the dollar. During the current financial tsunami, the Federal Reserve has injected a lot of dollars into the system in order to help the functioning of financial markets. While the Fed's move has received praise from a majority of the people, the increase in the supply of dollars to some extent will reduce and dilute the value of the original dollar. This is especially true during the time when the United States Government increases its overseas borrowing in order to cover the budget deficit.

Doing nothing to the dollar slide indeed will bring long-term risks to the United States. If foreign governments and private investors lose confidence in the dollar, thereby slowing down the pace of buying U.S. treasury bonds, the U.S. interest rate is likely to rise step by step. Then the hegemonic position of the U.S. economy will face a fundamental shake-up.

E. Euro, Chinese Yuan, and U.S. Dollar: Each Has a One-third Share of the World

We all know: Since the last century, after the euro was born it became progressively stronger, and China's foreign exchange reserves rose from 1 trillion to 2 trillion dollars in one fell swoop. But the dollar has never been as strong as it was at any time in the last century. This is because of the general trend that the U.S. dollar will decline after its heyday and no authority or any person in the United States can influence and manipulate it. Depreciation of the dollar is not due to the U.S. dollar being unable to adhere to its global domination, but is the inevitable frustrating result that the U.S. leaders could not avoid since the end of the 20th century.

Historically speaking, since President Bush took office in 2001 until January 2009, it has been a full eight years that witnessed a consistently declining position in the history of the dollar. Bush did two big things that for more than 200 years no other U.S. president has engaged in: 1) Fighting the war in Iraq has cost the U.S. three trillion dollars of wealth and made the country have the largest debt in its history; and 2) Implementing the nation’s largest tax cut, which was to fulfill the biggest presidential election promise to voters. But the tax cuts did not benefit most American families; rather they first benefited the U.S. multinational companies, and were then followed by the financial tsunami that made people lose about 8 trillion dollars. The combination of the most expensive war, the largest tax cut and the financial tsunami has created the biggest wealth gap in American history. Otherwise, where did the giant wealth gap of the United States in its more than 200 years come from? The U.S. sub-prime mortgage crisis again and again caused the lack of mobility of capital. After interest rate reduction, and further reductions, capital injection, and more injections, the situation is still hopeless. How big and deep is the source of the U.S. financial vulnerabilities in the end? How much more working capital is needed? Bush and Obama waged bailout money to plug the hole. But a deep analysis is needed to determine the total cost of the last eight years in America’s two-century history in order to save the fate of the dollar.

The sharp, continuous and large-scale decline of the dollar since the 20th century is already at the stage where nothing can be done about it. After 2007, the dollar index fell sharply by about 13.2%. Counting from the date right before the Chairman of the United States Federal Reserve Ben S. Bernanke took office, the dollar decline to date has been as high as 18%. Is this another repeated cycle of the dollar in its 232 year history after the eight-year prosperity of the Clinton era and the 20-year miracle of the Greenspan era? The Greenspan era after the 20th century was completely different: the first 220 years of American history was the period when the dollar became the world's largest unified international currency; then the euro reduced the dollar’s influence; and then around 2008, the Chinese yuan also began to embark on its historical path gaining the proper place that it deserves. The Chinese yuan of the largest growing nation among the emerging economies is becoming an important currency unmatched by any other currency.

The world has entered into a period with an "iron triangle" currency status that it never had before. After the dollar unified the currencies in the world for more than 200 years, the dollar, the euro and the Chinese yuan all have a one-third share of the world. How to prevent the dollar value from declining further? How to prevent the dollar, which was strong for more than 200 years, from being replaced gradually by other emerging currencies - the euro and the Chinese yuan?

But the problem is just at the beginning–the U.S. financial tsunami and economic downturn have just gone through a bit over a year. From now on, the euro can get stronger to meet the continuous demands of 300 million Europeans’ development. And China that owns 2 trillion dollars of foreign exchange reserves and 1.3 billion people can also begin to really rise, which would give the yuan a space that belongs to China's own world outside the dollar and the euro influences. Then where should the dollar go under their double pincer attacks? Doesn’t every one know where it should go?! (The author is the chief researcher of the Internal Information of the National Condition).

* Among them, the Hong Kong Monetary Authority (HKMA) in less than a week’s time from October 15 has consecutively injected funds twice into the market, respectively 3.875 billion and 1.55 billion, totaling 5.425 billion Hong Kong dollars. According to the current Hong Kong's linked exchange rate system, the Hong Kong dollar (HKD) is linked to the U.S. dollar (USD) at the fixed rate of HKD 7.8 to USD 1. In practice, the HKMA has set 7.85 as an upper limit and 7.75 as a lower limit since May 18, 2005. Whenever the market rate hits HKD 7.75 to USD 1, the HKMA buys USD from licensed banks, i.e. it converts USD for HKD, increasing the HKD supply so the market rate will climb back to 7.80; whenever the market rate hits HKD 7.85 to USD 1, the HKMA sells U.S. dollars, i.e., it converts HKD for USD, increasing the USD supply so the market rate will get back to 7.80. The two-way convertibility is guaranteed by centering on HKD 7.8 to USD 1 in a “balanced” symmetrical operation.