The dollar's dramatic fall grabs headlines every day, even as the stock market surges to new recovery highs. People are talking about a "dollar crisis," and it's not just the usual rant-and-rave topic on CNBC. There are serious hints from government authorities around the globe that maybe we should think about dethroning the dollar as the reserve currency held by the world's central banks, and that perhaps global markets for things like oil should no longer be priced in dollars.
There are currencies that are as weak as the dollar, such as the British pound. And some are weaker, such as the Malaysian ringgit. But against a basket of the world's major currencies, the dollar has fallen 15% in just seven months. That's a big move in any market, but for a currency it's practically a crash. If it falls an additional 6%, it will make all-time lows.
You'd think that with all this going on, officials at the Treasury Department would be running around in a flat-out panic. But they're not. I recently met in Washington with a group of the most senior men at Treasury (please forgive me if I don't name names) and I was surprised to learn they are not terribly worried.
Here's why:
First, the Treasury officials think that the dollar's 15% decline is actually a sign of economic strength. They point out, quite correctly, that the value of the dollar surged during the recent credit crisis, as investors around the world suddenly craved the safety of dollar liquidity.
At the most, the dollar soared 24%, reaching its top on the same day last March that the stock market made its bottom.
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By that I mean that when the world economy came off the rails last year, everyone in the world needed dollars -- not pounds, not euros, not yen, not yuan -- because the dollar is the de facto unit of global trading and investment. Why should the economies of the world be so dependent on a single nation's currency?
Video: The dangers of a weak dollar
While it may feel like a blow to our national prestige to have the dollar perceived as just another currency, it is probably inevitable -- and probably all for the best. It's in America's interest to live in a world more resilient to credit shocks than the dollar-dominated world turned out to be.
Another reason the Treasury isn't in a twist about the dollar is that officials recognize there is nothing they can do about it. Oh, sure, Secretary Tim Geithner could give a speech or two about his "strong dollar policy," for all the good it would do, which would be precisely none. By the way, when I visited Treasury, nobody even mentioned the expression "strong dollar."
The reality is -- and the Treasury knows this -- that it's the Federal Reserve that ultimately determines the value of the dollar. That's because the Fed's monetary policies determine inflation -- and obviously, a currency undergoing inflation is worth less than a currency not undergoing inflation. So if you want a strong dollar, write a letter to Fed Chairman Ben Bernanke, not Geithner.
Continued: Buy gold, the alternative currency
