Nothing funny about dollar’s woes

William Pesek

12/26/2009

Add Benjamin Franklin’s wink to the U.S. dollar’s list of humiliations.
The 18th-century American statesman is perhaps best-known in Asia for gracing the front of the $100 bill. Asians used to worry about counterfeit “Benjamins.” Now, they’re frightened of the real thing. So far this year, 25 percent of the dollar’s value has melted away versus the yen. Time for a redenomination? Japanese toy maker Bandai certainly thinks so.
This month it unveiled “Bubbly Bubble Bath” dollar soap. It’s a paper-thin replica of the $100. Only, this one is a $1,000 bill. Just so the most gullible among us aren’t fooled, it features a winking Franklin – as if he’s in on the joke.
Comedians like David Letterman are increasingly working the dollar into their acts. That’s where the humor ends. It would be fun and games if not for an experience I had recently in Hanoi: merchants were far less keen on taking my dollars than a year ago. It’s an important man-on-the-street sign of the dollar’s plight.
Waning demand for dollars in places where it’s long been rock-solid can be seen among Vietnam’s eclectic gold speculators. When we think of gold gamblers, an image closer to George Soros often comes to mind. Stereotypes die fast when visiting one of Hanoi’s ubiquitous black-market areas. Housewives, many with toddlers in the arms, jostle to unload their dong and dollars for the safety of hard assets.
Times were when Vietnamese merchants knocked one another over to get their hands on dollars. Today, the world’s reserve currency is under more pressure than ever as hedge funds begin wondering if Dubai will go the way of Iceland.
Few considered the economy of the tiny North Atlantic nation before it collapsed last year. It sent shockwaves around the globe and had investors scrutinizing Asia for economies similarly run like national hedge funds. At the time, many investors homed in on South Korea, which was thought to be overexposed with too much short-term debt.
Korea turned out to be fine. Many wouldn’t say the same thing about Vietnam these days. On Dec. 8, for example, Nomura Holdings Inc. said Vietnam has the makings of a “classic” emerging-market crisis and investors should buy protection against a sovereign default.
At the time of the Nomura report, investors in emerging- market debt had earned about 26 percent this year as the world recovered from the worst global recession since World War II, according to a JPMorgan Chase & Co. index. Dubai’s troubles fueled concern that emerging-market returns mask difficulties in specific nations. News last month that Dubai World was attempting to reschedule debt shook investors. Many worried it was a harbinger of a blowup in emerging markets.
Fears are easing a bit. Dubai this week got a $10 billion bailout from Abu Dhabi. Kuwait said it’s willing to provide financial help to the United Arab Emirates.
Dubai’s significance, like Iceland’s, far exceeds its economic size. The entire U.A.E. economy is $163 billion, roughly the size of the Philippines. It’s more about what it says about the state of credit markets.
The extent to which they are still in disarray can be seen in how Dubai’s straits affected risk appetites near and far. Investors, worried that sovereign debt is the new subprime, quickly shunned assets like stocks, commodities and the dollar.
The dollar has stabilized since the initial Dubai shock, as authorities acted to reassure investors and U.S. data showed signs of life. Yet markets remain on guard for the slightest hint of renewed trouble.
Hence the frenetic demand for gold in places like Hanoi. The precious metal lost favor in Asia a decade ago, just after the region’s 1997-1998 crisis. Then, the focus was on hoarding dollars to protect economies from market turbulence and weakening local currencies to help exports.
The process was called “Bretton Woods II” and featured an unofficial dollar peg. Why warehouse bars of gold when you can stockpile dollars digitally? Now, India’s $6.7 billion gold purchase from the International Monetary Fund last month has markets buzzing about the evolution of a “Bretton Woods III.”
Few countries are likely to go as far as establishing the kind of strict gold standard that U.S. President Richard Nixon scrapped in 1971. Yet expect gold to take on a growing share of central banks’ reserves as a hedge against turmoil in markets.
The effort to find a new reserve currency is a long-term project. There’s no easy alternative, though. That helps explain the modern-day gold rush unfolding in capitals around the globe.
It also explains why, Benjamin Franklin’s wink aside, the dollar’s woes are anything but amusing. &#8226