What is so almighty about the dollar?
It is a bit simplistic to see the recent rise of the dollar against most world currencies as typical market frivolity or perverse speculative maneuvers. If money has been pouring into New York from the major world capitals it is a reflection not only of the strength of the American economy, but of the difficulty that other countries are having at modernizing their economies to new capitalistic structures.
America has given indisputable proof that it is better at running its economy than most. The US has been creating new employment at ever accelerating rates. It has won the battle against inflation. More than any other country in the world, it is committed to important transformational projects in the computer sciences.
In comparison, Europe can’t help but measure its own economic policies as inadequate. While the American government continues to decrease the tax burden of its businesses and its citizens, the European governments are raising them in order to keep their budget deficits in line with the criterion of the Maastricht treaty. The leftist governments in France and Italy in particular have been reluctant to take any serious measures to cut welfare costs or downsize their bureaucracies. Even Germany has had to soften its tactics in order to calm its constituents.
If on the one hand the appointment for European monetary union is just around the corner, parameters have yet to be set of individual currencies against the Euro. Nor has it been decided who will be able to participate in the first round. In this type of scenario, the Euro can’t help but be perceived as a weak substitute for the German mark. There is nothing better than indecisiveness to make for nervous market conditions. The stock market witnesses this every time it waits for a decision to be made by the Fed. The same rules obviously apply to the volatility of the currency markets.
The secret behind the strong dollar, then, is not so much a question of speculation as one reflecting the reorganization of the world market economy and changes in the structure of capitalism. While the world is rendering recognition to the fact that capital invested in the United States earns more with less risks, doubts about the Euro must also be factored into the dollar’s recent climb against most European currencies.
August 1997
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