By Matthew Rusling
WASHINGTON, Oct. 20 (Xinhua) -- Despite the dollar's drop last week to record lows, many economists said the slide is no cause for alarm.
At the same time, long-term economic pressures, if not addressed, could in the long term cause the greenback to lose its status as the global reserve currency, economists said.
Alan Greenspan, former head of the U.S. Federal Reserve, said last week he is not "overly concerned" about the recent slide.
He pointed out, however, that the U.S. ability to finance its debt -- the "cushion" that made the dollar the world's currency of choice -- is declining.
"There is no question that the cushion is going down," he said. And once long term interest rates and inflation begin rising, it will be late in the game to reverse those trends, he said.
Other economists pointed out figures that back up claims of the dollar's demise: while central banks typically invest nearly two-thirds of their assets into dollars, they put just 37 percent of assets into the greenback in the second quarter.
The weakened dollar, which on Thursday slid to its lowest point in more than a year, makes imports such as oil more expensive -- the price of crude increased to a nearly one-year high of 77.58 dollars per barrel on Thursday. The greenback has also pushed up the price of gold to recent highs.
On Friday the dollar remained near its 14-month low, although it rose slightly against the euro.
Derek Scissors, research fellow at the Asian Studies Center at the Washington, D.C.-based Heritage Foundation, noted that recent talk of the greenback's decline is louder than usual. Much of this is tied to speculation that oil producing nations could move toward pricing their product with a basket of currencies, rather than just the dollar, he wrote in a blog post.
If that turns out to be the case, those nations have good cause to shy away from the U.S. currency -- the U.S. Federal reserve has pumped too many dollars into the world economy, causing the greenback's value to drop, he said.
In the long term, deficit spending could boost the dollar's troubles.
"Unnecessary deficits under the Bush Administration have given way to colossal deficits under the Obama administration, plus a free-for-all Congress that seems to be in charge of economic policy," he said. "When a government can't control itself, its economic partners deduce they can't trust the value of that country's currency."
Indeed, at 1.4 trillion dollars, the 2009 budget deficit is the largest since 1945, the Congressional Budget Office reported last week.
For the moment, however, many economists remain unperturbed, pointing out that the dollar has simply dropped back to pre-crisis levels after soaring 20 percent between July 2008 and March this year.
Ben Carliner, director of research at the Washington, D.C.-based Economic Strategy Institute, said the currency's recent lows are no cause for concern. Rather, they are symptomatic of the challenges facing the economy.
A weaker dollar, he said, mirrors the structural changes the global economy must undertake to get back on the path toward sustainable growth.
Those could include reforming the tax code -- perhaps by introducing a value added tax along with lower capital gains taxes-- to allow Americans to boost savings and pay off their debts. But that would slow U.S. consumer spending, which drives the global economy, and require other nations to pick up the slack, he said.
The other possibility is depreciating the dollar, but that could lead to protectionism, he said.
Scissors said there is still time to bolster the dollar, and help may come from China. China's RMB, for example, is tightly pegged to the U.S. currency. And with 2.1 trillion dollars in its coffers, China holds around three times as many dollars as all other currencies combined. That means the greenback will retain its place as the world's currency for some time, he said.
Still, the U.S. needs better economic policy at home to guard against the dollar's decline, and Obama needs to exercise leadership and discipline -- both are absent so far, Scissors said-- in the next federal budget.
Economist Paul Krugman, a Nobel prize winner, wrote this week in the New York Times that a weak dollar is a positive development.
"For one thing, it's mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it's falling again now that the fear is subsiding," he said.
Dean Baker, co-director at the Washington, D.C.-based Center for Economic and Policy Research, said the recent drop is a positive sign and one that will help boost exports.
He dismissed gloom and doom predictions of a global decline of the dollar. So many nations have a stake in the greenback, he said, that no central bank would allow it to depreciate to the point of losing its global status.
