The King of Currency

By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 9 July 2009, 7.50 am and 7.20 pm)

Before Michael Jackson, the King of Pop, dominated the music world, there were the Beatles and Elvis Presley. Both dominated the music world in the 1960s. Going back to the 1950s, it was Frank Sinatra.

With Michael Jackson now gone, many believe that no one can replace him. Currently, there is an ongoing debate whether his music would become more or less popular.

In the finance world, a similar debate is going on. Here the question is: Is the dominance of the US dollar over? And if so, which currency will take its place?

Just like great musicians throughout history, currencies also come and go. In the 18th and 19th centuries, the dominant currency was the British pound. In the 17th century, it was the Dutch guilder. Go back more than two thousand years, it was the Greek drachma.

Today, we are concerned about the US dollar. That’s because the US Treasury has boosted the supply of dollars in quantities, never seen or imagined before. With supply so abundant, we expect the US dollar to weaken.

But if abundant supply is the criteria for a currency to weaken, Japan’s experience in the past decade does not bear this out. Because even though Japan flooded the world with its currency, the yen did not weaken. Instead, it rose against the dollar.

Every day, we read and hear of more compelling reasons why the dollar must fall. It is a mistake to view the dollar in isolation. This is because currency markets do not operate in a vacuum.

A currency does not have absolute value, only relative value. In other words, a currency is valued on its relative strength or weakness against another currency.

We must not forget that the US economy is not the only one that is weak. The Japanese and many European economies are just as weak, if not more. And the US is not the only country that has printed lots of money. Many central banks have also printed lots of money.

Whether the US dollar will remain as the “King of Currency”, and as the world’s reserve currency really depends on its appeal.

To my mind, the US dollar is still the most appealing. No other currency has a flexible record stretching back to the 1970s. No other currency is backed by a larger economy. No other currency is backed by a more sophisticated financial system. And no other currency is backed by a more mature political and military complex.

All these conditions point strongly in favour of the US dollar as the dominant currency, now and in the immediate future. It also suggests that the US dollar will strengthen.

Like the monsoon rains that arrive on a seasonal basis, the rise and fall of the dollar, against a basket of currencies, also comes in cycles. Since 1971, the US dollar has gone through five cycles, alternating between weakness and strength. And each cycle lasts about seven years.

In its first cycle, between 1971 and October 1978, the dollar fell some 30 percent. Then, from 1978 to February 1985, it rose about 100 percent. In its third cycle, between 1985 and September 1992, it fell some 50 percent. From 1992 to July 2001, it rose about 55 percent. In its fifth cycle, between 2001 and mid 2008, the dollar fell some 40 percent.

The dollar is now in its sixth cycle, which began in mid 2008. So far, the dollar has risen only about 12 percent. If this is the beginning of its seven-year bullish cycle, then expect more upside for the dollar.

Let’s put it this way. There is still no serious challenger to the dollar as the world’s dominant currency. If the dollar were a street fighter, it could easily defeat all those who dare to challenge its dominance. It would flex its muscles and shout what Michael Jackson did in one of his famous songs – Just Beat It!