Dollar demise?

Vivek Sharma
26 November 2007

Predictions about the impending death and burial of the mighty US dollar have increased these days. But, it may not happen so soon.

Jim Rogers, the well known investment guru, is as close to a showman you will get among investment legends. After making his money, roaming around the world first on a bike and then in a car, and re-branding himself as the messiah of commodities, he has now become a born-again Chinese. Like most members of born-again faiths, he is nearly fanatical in his convictions about a future that will be all Chinese.

In line with his convictions, Rogers recently predicted that the Chinese Yuan can appreciate in value as much as three to four times over the next decade or two. If that prediction turns out to be true, going long on the Yuan - or the Renminbi as it is officially called - will be one of the best investment opportunities of our times. Rogers is backing his words with his deeds - he has already sold off his last dollar and has taken all his assets overseas.

Rogers is not an exception, though he is probably the most vocal in shunning the dollar. The greenback has steadily lost ground against other major currencies in recent years. The Canadians celebrated recently when their currency, called the loony in currency trading circles, achieved parity with that of their snobbish neighbours. The Europeans maybe complaining publicly about the loss of export competitiveness, but secretly they must be enjoying the increasing influence of the euro.

But, can we take the demise of the dollar for granted? While weak fundamentals of the US economy and the shift in global economic power to large emerging economies make it likely in the very long term, the dollar decline may not happen as fast as many hope it would be. Here are some reasons why the dollar may survive the doomsday scenarios.

The US will remain on top for some more decades
Even if the large emerging economies sustain their high growth rates in the long term, which won''''''''t be easy, the US will remain the biggest economy for at least two or three decades more. Going by the most optimistic projections, China will catch up with the US in total economic output only by 2035. Until then, the US will remain the primary driver of global economic growth. All the talk of global growth having decoupled from the US economy is a bit premature and untested so far.

Yes, the US economy is very likely to go through a rough patch next year and, possibly, the year after that too. But, there is nothing to suggest a prolonged recession and it won''''''''t be long before US growth picks up to its long term average of around 3 per cent per annum.