Greenback’s Demise is Greatly Exaggerated

12/05/2007 12:00 am EST

Focus: MARKETS

John Christy

Founding Editor, Forbes International Investment Report

John Christy, editor of Forbes International Investing Report, says the US dollar may weaken further, but it won't be replaced as the world's reserve currency any time soon.

Unless you've been living in a cave, or bartering for goods and services at the local bazaar, you have probably noticed that the value of the US dollar is tanking. Big time.

Over the past five years, the almighty dollar has lost about a third of its value against the euro. The British pound and even the Canadian "loonie" are trading at multi-decade highs against the dollar and the Japanese yen has strengthened sharply against the dollar in the past few weeks.

For currency traders, economists, and global investors, the steady decline of the greenback isn't exactly breaking news. But what's interesting is how much popular attention the dollar's demise has been getting lately.

In a recent music video, rapper Jay-Z carries a suitcase full of euros instead of dollars on the streets of New York City. Brazilian supermodel Gisele B√ľndchen is apparently demanding payment in euros for some of her contracts, which are normally denominated in dollars. And according to the Financial Times, India's Taj Mahal, which once encouraged visiting tourists to pay the admission fee in US dollars, is now demanding payment in rupees instead.

These are amusing anecdotes, but investors should be careful about getting too carried away with the dollar collapse thesis. The death of the greenback has been greatly exaggerated.

True, the euro has been a successful experiment since its launch in 1999. But two-thirds of international reserves are still held in dollars. Roughly 30% is held in Euros and the rest is spread among other currencies.

But it takes more than eight years to create a genuine replacement for the dollar as the world's reserve currency of choice. The US is the world's biggest economy and home to its biggest and most liquid capital markets. That won't change overnight.

If anything, a contrarian could make a strong case that once supermodels and hip hop stars are on the bandwagon of any investment theme, the party is pretty much over. There may indeed be a short-term dollar bounce ahead next year for trader types to exploit.

But the big picture remains crystal clear: the dollar will remain under pressure and international diversification is essential to protect your wealth. The dollar's status as the world's reserve currency of choice may not be in danger, but with a current account deficit running at 5.5% of GDP, and the prospect of lower interest rates and a softening US economy, the greenback is swimming against some pretty stiff fundamental currents.

The current dollar debate has a lot in common with the general case for international investing. Diversification has always made perfect sense. It only seems like a "hot topic" these days because so many Americans have ignored it for so long. Talk of foreign governments, supermodels and big investors diversifying out of dollars isn't strange. The strange thing is that it didn't happen sooner.

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