Slow demise of the mighty greenback

Slow demise of the mighty greenback - Business - Business - smh.com.au

THE US dollar - once the surest store of value in the world economy - is crumbling, fuelling speculation the powerful US economy is losing its grip on the global economy.

Since 2002 the value of the greenback has almost halved, averaged against America's major trading partners.

This week the currency hit an all-time low against the euro, a quarter-century low against sterling, and an 18-year low against the Australian dollar.

Yesterday morning the Australian dollar hit US86.41c, its highest level against its US counterpart since February 1989.

For Australian businesses and consumers, the US currency's slide, and its corollary, the Australian dollar's ascent, is both a blessing and a bane.

For consumers, the big boost has been assistance at the petrol bowser. "Let's assume that the Australian dollar hadn't appreciated as it has over the last year," the director of research at Grange Securities, Stephen Roberts, said.

"The current bowser price of petrol would be closer to $1.45 a litre rather than somewhere in the low $1.20s."

But the rising dollar is a mixed blessing for many companies.

On the one hand it reduces the price of imported goods and materials.

On the other it hurts firms trying to sell goods overseas or those with earnings denominated in US dollars.

Credit Suisse downgraded its earnings forecast for the paper manufacturer, PaperlinX , yesterday by a yearly average of 15 per cent over the next five years.

The poker machine company, Aristocrat, is also struggling against the headwind of the declining US dollar.

Aristocrat has more than half of its earnings in US dollars, which shrink in value when swapped back into Australian dollars.

And building materials supplier Boral is also suffering, with 30 per cent of its earnings in US dollars.

While the implosion of the US sub-prime mortgage market has rattled markets over the last two months, economists say the chief reason for the US dollar's deterioration is the monster US trade deficit against the rest of the world and particularly against China.

US trade negotiators have been applying heat to their Chinese counterparts to let the Chinese yuan appreciate against the US dollar.

This would assist America's trade position by making US goods more affordable overseas.

If the US trade position does not improve, the US has to attract a huge amount of foreign capital to help finance its deficits.

"There's been no real difficulty in attracting a capital inflow," Grange's Mr Roberts said, "but the US always needed to offer this carrot that the US dollar would slowly decline, as an indication that something is changing - that it would help the trends to stabilise."

NAB's head of research, Peter Jolly, said international investors had grown wary of the continued US trade deficits.

"When I talk to people they mention the current account deficit in Australia, they know it's large, but the interest rate that they get here and the return out of the stockmarket is certainly enough to compensate for that risk," Mr Jolly said.

"But when they look at the US they see a structural problem and a cyclical weakness. And when you add those two together it doesn't look great from a currency perspective."

The chief strategist at FxMax, Clifford Bennett, said international investors had shifted their sights away from the US.

"Global portfolio managers aware of the steady decline of the US dollar look elsewhere to invest, which means less investment capital for the US, a lower US dollar, and further reluctance among funds to invest there. "This spiral is only just beginning and it is likely to take the US dollar to far lower levels than anyone imagines," Mr Bennett said.

Asian central banks shifting assets out of US dollar bonds pose another risk.

An adviser to Japan's Prime Minister this week said that Japan, the largest overseas holder of US treasury bonds, should spread $US700 billion among other assets such as euros, Australian dollars and emerging-market currencies.

But Westpac's chief currency strategist, Robert Rennie, said any shift out of US dollar assets would be slow. "Managers of reserve assets are traditionally glacial in shifting assets."

There isn't that Much Gold in the World, unless you count what's in Museums and they sure as hell aren't going to give that up.