Market Report: Once Mighty Greenback Loses Ground, Respect

When did the US dollar become the Rodney Dangerfield of global currencies? Maybe Gisele was right about wanting to be paid in euros after all. The once mighty greenback continues to lose ground and respect. Things are getting so bad that if you dropped a dollar in a sandbox a cat would bury it.

The dollar is now a punch line as commodities continue to find comfort at higher ranges. Record budget deficits and no signs that the Fed is about to reverse course on its accommodative policies has oil prices finding love and happiness at these higher ranges. Not even OPEC's declaration that oil prices above $80 are a concern has the commodity bulls' confidence waning. Right now unless they are thwarted by central bank intervention or signs of an exit strategy, commodity bulls will continue to test the upper limits and threaten the economic recovery.

In fact in today's New York Times Paul Krugman is putting the blame not on record spending and deficits but on the Chinese. Krugman writes, "Senior monetary officials usually talk in code. So when Ben Bernanke, the Federal Reserve chairman, spoke recently about Asia, international imbalances and the financial crisis, he didn't specifically criticize China's outrageous currency policy." "But he didn't have to: everyone got the subtext. China's bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world -- and, in particular, the United States -- will do about it." Krugman says, "The value of China's currency, unlike, say, the value of the British pound, isn't determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market -- a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country."

Krugman continues, "There's nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. In fact, the system served China well during the Asian financial crisis of the late 1990s. The crucial question, however, is whether the target value of the yuan is reasonable. Until around 2001, you could argue that it was: China's overall trade position wasn't too far out of balance. From then onward, however, the policy of keeping the yuan-dollar rate fixed came to look increasingly bizarre. First of all, the dollar slid in value, especially against the euro, so that by keeping the yuan/dollar rate fixed, Chinese officials were, in effect, devaluing their currency against everyone else's. Meanwhile, productivity in China's export industries soared; combined with the de facto devaluation, this made Chinese goods extremely cheap on world markets.

"The result was a huge Chinese trade surplus. If supply and demand had been allowed to prevail, the value of China's currency would have risen sharply. But Chinese authorities didn't let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.

"Many economists, me included, believe that China's asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China's insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

"Although there has been a lot of doom saying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it's getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

"But China has been keeping its currency pegged to the dollar -- which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

"And that's a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I'd be among the first to reject claims that China is stealing other peoples' jobs, but right now it's the simple truth." A must read in the Times.

Oil continues its increase even as jobless claims rise. Bloomberg News said gasoline futures retreated from a seven-week high as jobless claims rose more than forecast, indicating the labor market won't immediately recover and demand for the motor fuel may weaken. Initial claims for unemployment insurance rose by 11,000 to 531,000 in the week ended Oct. 17, the Labor Department said today, more than the 515,000 more than forecast.