THE WEAKNESS of the dollar and the strength of the euro are two causes of concern – and not just for the European Central Bank (ECB) and its US counterpart, the Federal Reserve. The dollar’s steady decline in value reflects a gradual shift in the balance of global economic power and marks a loss of American political influence. There is a change in the old pattern of economic development where the rich Group of 8 (G8) countries including the US, Japan and major European states got richer while the developing world marked time or became poorer.
The emerging economies of China, India and Brazil are the new centres of growth in a world economy where governments are still struggling to fix the global financial system. The Group of 20 (G20) reflected the new order when it met in Pittsburgh last week. It includes both the world’s major developed economies and many of the developing and resource-rich nations. This ensures a more balanced representation in this global forum and should result in more effective economic co-operation by member countries. Political power is slowly shifting away from the US, Europe and Japan.
The International Monetary Fund (IMF) has reported that the dollar’s share of global currency reserves fell in the second quarter while the euro’s share rose to a record 27.5 per cent. The dollar serves as the world’s main reserve currency. But its drop in value over recent years has made it a much less attractive investment option and renewed questions over its reserve currency status. The dollar is seen as a depreciating asset that produces a low yield return for investors. In June, Brazil, Russia, India and China considered swapping currencies to reduce their dependence on the US currency.
The Group of 7 (G7) finance ministers will meet later today in Istanbul amid growing international concern about the dollar’s sustained weakness. ECB President Jean-Claude Trichet has called for a much stronger dollar and warned about the adverse effects of currency volatility on a fragile world economy. Certainly, the weak dollar has made it even more difficult for Irish exporters to sell their goods and services into a depressed US market. In the past co-ordinated G7 intervention in currency markets has generally succeeded in weakening or strengthening currencies, as required. A similar move to succeed this time would require a reduction in global interest rates to US levels. And that would require the ECB to make the biggest rate cut, which Mr Trichet would be reluctant to do.