ECB's Nowotny Sees Global `Tri-Polar' Currency System Evolving

[dex]

Bloomberg.com: Worldwide

European Central Bank council member Ewald Nowotny said a ``tri-polar'' global currency system is developing between Asia, Europe and the U.S. and that he's skeptical the U.S. dollar's centrality can be revived.
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Follow the money. The US was the lone superpower. With our entitlement burdens and national debt (among other things) the power/influence of the US will decline and others will fill the vacuum. Over time power will be migrating to Asia (China/India) and Europe.

How this "Tri-polar" currency system develops is key. There are a lot of dollars outside the USA if other countries lower there holdings and demand for US treasuries there could be a large hike in US$ interest rates.

Investing wise take a look at international funds ex US, emerging markets and watch currency exchange rates.

A downside possibility is that countries manipulate their currencies (like China is doing and others do to stay within parity of the US$) in a new twist to the trade restrictions enacted during the depression. They keep their currency low to keep production in their country and keep employment up.

Short term - 1 year? - I think the dollar will strengthen slightly from the current rates. After that it weakens again. So now is a good time to buy foreign funds.

 

[FIREd]

How this "Tri-polar" currency system develops is key. There are a lot of dollars outside the USA if other countries lower there holdings and demand for US treasuries there could be a large hike in US$ interest rates.

But if interest rates go up in the US, wouldn't it entice foreigners to buy more treasuries (at least as long as the US government maintains a AAA credit rating) and therefore strengthen the dollar?

I think there are a number of hurdles against a true "tri-polar" currency system. 1) the stability of the Euro. The Euro is not like the dollar. It is not the currency of a single, unified country. It's the currency of a group of countries that cannot agree on much and often pull in different directions to suit their particular needs. Every so often, there are threats from Germany and others to do away with the Euro and go back to the good old days when the Bundesbank was setting interest rates appropriate for the German economy. I don't see it happening anytime soon, but given the right political and economic conditions, some countries might want to move away from the rigidity and limitations imposed by the Eurozone. It's interesting to note that more than a few of my European friends think that the Euro will have disappeared in 10 years. Off course the ECB won't acknowledge that... 2) The political risk in Asia is still great and I don't think people will sell their dollars to seek the safety and stability of the Rupee and Yuan anytime soon.

So in the foreseeable future, if you want to invest in AAA-rated bonds with little or no political risk, then you will continue to buy the USD.

 

[dex]

But if interest rates go up in the US, wouldn't it entice foreigners to buy more treasuries (at least as long as the US government maintains a AAA credit rating) and therefore strengthen the dollar?

I think there are a number of hurdles against a true "tri-polar" currency system. 1) the stability of the Euro. The Euro is not like the dollar. It is not the currency of a single, unified country. It's the currency of a group of countries that cannot agree on much and often pull in different directions to suit their particular needs. Every so often, there are threats from Germany and others to do away with the Euro and go back to the good old days when the Bundesbank was setting interest rates appropriate for the German economy. I don't see it happening anytime soon, but given the right political and economic conditions, some countries might want to move away from the rigidity and limitations imposed by the Eurozone. It's interesting to note that more than a few of my European friends think that the Euro will have disappeared in 10 years. Off course the ECB won't acknowledge that... 2) The political risk in Asia is still great and I don't think people will sell their dollars to seek the safety and stability of the Rupee and Yuan anytime soon.

So in the foreseeable future, if you want to invest in AAA-rated bonds with little or no political risk, then you will continue to buy the USD.

That's right it is a supply/demand thing with the interest rates and the US$. The US has benefited to relatively low interest rates because countries/people want them and the perceived security aspect.

The euro - it will stay around. European countries realize they just can not go it alone in today's world. The EU might not expand as much as it planned and it might get rid of the smaller countries that are a drag on it. The individual countries of Europe would not have been able to act as fast or with the amount of funds they did if it was not united.

Asia - countries will align themselves with a powerful country that will help them the most. In Asia; it is China and India.

Time line - this financial crisis is the first crack in the $ wall. I'd guess no later than 10 years this trilateralism alignment, while not fully formed, will be evident to most if not all.

Maybe one of the shockers coming out of the next or a future OPEC meeting will be a move away from valuing oil in US$

 

[FIREd]

The euro - it will stay around. European countries realize they just can not go it alone in today's world. The EU might not expand as much as it planned and it might get rid of the smaller countries that are a drag on it. The individual countries of Europe would not have been able to act as fast or with the amount of funds they did if it was not united.

While you are right when you say that "European countries realize they just can not go it alone in today's world", they don't need to share a common currency to make it, what they need is a strong European Union.

European politicians generally support the Euro, but there is no lost resentment for the common currency among regular people. People feel like the Euro was rammed down their throat by eager politicians. The currency switch was followed in many countries by a spike in inflation which reduced purchasing power and increased resentment. I am a European voter, and while I have always supported the Euro, I know plenty of people who never have and never will. If you live in a country in recession and the ECB keeps the interest rates at 4% because other countries are booming, there will be a political backlash and pressure to revert to a national currency will mount. This will only reinforce the argument that the Eurozone is taking decision making out of the hands of national governments (an already touchy subject). Also the Eurozone rule capping national budget deficit at 3% of GDP is also forcing governments to cut back on popular programs in times of crises which fans people's dislike for a centralized currency policy. You may think that this is an unlikely scenario, but you have to understand how we, Europeans, see Europe.

 

[Marquette]

You know, the biggest thing that, economically, scares me is if China decides to dump their dollar holdings on the market in a quick and disorderly fashion. Sure, they'd hurt themselves in the process, but man, what an opening move to some sort of conflict.

 

[dex]

I like the goals of ECB more than the US Fed's goals. Over the long term that will result in more stable economic growth and more benefit to the individual (lower inflation). The higher interest rate while other countries are booming is difficult to handle. But those booming economies most likely will have a deeper recession than the ECB's path.

As to the 3% budget deficit - I wish there was something like that in the USA. Some states have requirements for mandatory balanced budgets. It helps keep politicians under control.

The more I think about the euro from that aspect - I can see it being a more secure currency in the long term. Of course economic development would play a large part.

Memories are short - in a couple of generations people won't remember national currencies - assuming relatively stable political & economic times. A financial calamity might give rise to nationalistic movements breaking the whole thing apart. On the other side - it there is a resurgent Russia the EU will need to be united to deal with it (without the USA).

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The main goal of the ECB is to keep inflation stable.

Fed.
The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy.

 

[FIREd]

I think that the best way to strengthen the Euro for the long term would be to create a United States of Europe, i.e. a federation of states under a centralized federal government. There is currently a political push to move in that direction (the European constitution being the most visible project) and, while I support the idea, there is real popular resistance to the project and it will be years before real progress is made towards unification (which I hope will happen eventually). But even for the optimists among us, it is impossible to ignore the hurdles. If you think that the US congress is a mess, imagine a group of 785 people, speaking 25 different languages trying to reach across cultural and ideological differences to reach a compromise that will work for everybody from Lisbon to Helsinki and from Athens to Dublin...

 

[kumquat]

If you think that the US congress is a mess, imagine a group of 785 people, speaking 25 different languages trying to reach across cultural and ideological differences to reach a compromise that will work for everybody from Lisbon to Helsinki and from Athens to Dublin...

Sounds like us here in Canuckistan. If I were you, I'd try to avoid it.

 

[FIREd]

Sounds like us here in Canuckistan. If I were you, I'd try to avoid it.

I know, it's not going to be easy, but I think that if Europe looks anything like Canada one day, it will have been a real success... There is a French proverb that says "l'union fait la force", union gives you strength. I think that if Europe wants to remain relevant, it has to unite and create a strong political, economic and military power.

 

[socca]

A couple of weeks ago I was idly wondering what the world would be like if there was a single global currency not tied to the interests of any particular country or region. I decided to call the new planetary currency the omega. Wouldn't it be great to have a pocketful of omegas and be able to go shopping anywhere in the world without currency exchange hassles?

So, what happens when each of the world's currencies fluctuate against the omega? How would some central bank manage the supply of omegas? The Europeans already have some experience with these issues with their transition to and management of the euro.

Well, another half-baked idea from socca...

EDIT: Perhaps the omega should be the world's first (?) currency without a coinage. You either use electronic means or you don't use it at all. This would avoid the many hassles associated with producing coins/bills that can foil counterfeiters, etc.