William Pesek Jr. / Bloomberg News Service – 2004-12-26 18:14:53
(December 20, 2004) — Being an American overseas these days can be a surreal experience. Virtually everyone, it seems, seeks that 10-minute why-I’m-upset-with-the-US conversation.
Recent stops in Bangkok, Hanoi, Kuala Lumpur, Singapore, Mumbai and Vientiane, Laos, featured myriad such moments, leaving little doubt that anti-American sentiment — or more to the point, anti-Bush-administration sentiment — is intensifying in Asia.
And is all this negativity manifesting itself economically? Yes, argues Joseph Quinlan, chief market strategist of Banc of America Capital Management in New York. It won’t make him many friends in Middle America, but Quinlan thinks the US image as a “rogue nation” is a key force behind the dollar’s decline.
“The message from the foreign exchange markets” of late “seems to be simply this: The free ride for the rogue nation is over,” Quinlan argues. “No more guns and butter, or wads of foreign cash for a nation deeply enmeshed in the Middle East, heavily indebted at home and seemingly disengaged — some might say — from the rest of the world.”
The sinking dollar, Quinlan says, “could be a sign that the world is no longer willing to underwrite the designs of US foreign policy. To a large extent, we believe a rebound in the US dollar could hinge on a revamped foreign policy.”
The Black Market
There’s ample economic justification for the dollar’s 7 percent drop versus the euro and 5 percent slide against the yen this quarter. Record budget and current account deficits are spooking investors, as are signs from President George W. Bush’s administration that further tax cuts are on the way. If so, the US economy isn’t about to fix its imbalances. That’s why some are quick to dismiss the idea geopolitics is driving down the dollar. “It’s an economic phenomenon,” says Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado. “I see little evidence on a blow-by-blow basis that swings in the dollar line up with political events.”
Still, a recent chat with black-market currency traders in Bangkok bolsters Quinlan’s argument. The US dollar is always a good thing to have in Asia, a region plagued by currency instability during the past decade. And so, Asia’s black marketers tend to seek out people who may be holding them.
In front of an ATM the other evening, a Thai exchanger approached me looking for euros or British pounds. Seeing I only had dollars, he winced. “No, I’m not buying dollars these days,” said the man, who would only tell me he first name, Ampon.
Dollar Mirrors the US
As Ampon explained, most people in his line of work in Asia figure the dollar will plunge this year. Asked why, he answered simply: “Bush will be around a few more years.”
All this does have a conspiratorial quality, and it’s impossible to quantify. Still, some long-time Asia watchers like Marc Faber have been warning investors US foreign policy will hurt the dollar. Faber, Hong Kong-based head of Marc Faber Ltd., has been highlighting the possibility the US will attack Iran.
Moreover, Faber says that what he views as “continuous human rights abuses” by the Bush administration in Iraq and elsewhere have made China’s human rights record “look like Cinderella.” That perception, he argues, is increasingly worrying investors who wonder about Bush’s plans for the world during his second term.
The dollar’s declines, Quinlan says, “mirror America’s plunging approval rating with the rest of the world.” It’s not just the Iraq war, he says, but also the decision to scrap the Kyoto environmental treaty, its strained relations with international institutions like the United Nations and its mounting visa restrictions.
`Music’ to Some Detractors
“It seems as if America’s popularity with the rest of the world has never been lower,” Quinlan says. “Little wonder, then, that the US dollar is as unloved as it is today.”
That’s music to the ears of some well-known US detractors like Mahathir Mohamad, who until October 2003 was prime minister of Malaysia. In a recent interview with Gulf News in Dubai, he said the US “owes huge sums of money to the rest of the world” and “if people do not keep giving money to the US, it will go bankrupt.”
Mahathir also suggested Muslim countries should refuse to trade in dollars and use their economic clout to force a change in US policies. Ironically, the US is following what’s known as the “Mahathir doctrine.” It refers to Mahathir’s decision during the 1997-1998 Asian crisis to rebuff the International Monetary Fund’s economic advice. Earlier this year, US Treasury officials dismissed the IMF’s concerns about soaring current account and budget deficits as “breathless hyperbole.” More Pressure
Why should Treasury officials care that the US has a growing credibility gap In Asia? Because central banks in the region have a huge say in whether the US continues living beyond its means or plunges into crisis. Asian monetary authorities hold more than $1 trillion in US Treasury securities. If they pull that plug, the US is in big trouble.
“The sooner America’s image is restored, the better the prospects for the US dollar,” Quinlan notes. “Our hunch is that this may take time, leaving the dollar vulnerable to more downside pressure.”
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