If this is the case then eventually many global transactions currently conducted in US dollars, including trading on the commodity markets in goods from precious metals to oil, eventually may have to be redominated too. The transition could, however, be a challenging time for global commerce and the airline industry in particular.
Simultaneously airlines could see the benefits of cheaper fuel bills; the uncertainty of currency risk on equipment and ticket prices in US dollars; and far reaching changes in the patterns of air travel as consumers adjust their habits to a different currency regime.
The trigger for the current bout of weakness for the US currency is almost certainly the open ended commitment which the Clinton administration has made to bailing out the Mexican government, an acceptance of moral hazard which may expose the US to similar obligations elsewhere in Latin Amnerica.
The deadlock which has developed between the Republican controlled Congress and the Democratic White House over the balanced budget has served to remind global investors of the soaring levels of national debt over the last 15 years. And perhaps most importantly of all, there has been recognition by global investors, banks and other international financial players that the Japanese yen and the German mark have become increasingly attractive as reserve currencies, because of their appreciation in value over the last 25 years.
The January bailout of Mexico illustrates why global investors have developed deep seated concern about the prospects for the dollar. Of the $55 billion rescue package assembled, the bulk of it from the US, some $20 billion was drawn from the US Treasury's exchange stabilisation fund, technically for use to assist the US in defence operations for the dollar on the foreign exchange markets rather than lend to foreign governments.
The effect of the loan is that another $20 billion is being printed to support a weak overseas government - not a prudent use. Each time the peso weakens against the dollar it provides a trigger for third country selling of the greenback. Having set what is seen as a poor precedent in Mexico, there is now concern that dollars will be required to prop up other weak currencies in Latin America.
The profligate use of dollars to handle the Mexican crisis has simply served to underline the appalling budgetary record of the United States in the period since 1980, with the US relying on government investors - largely in Japan - to buy official government debt. There had been growing expectation that with the takeover of the US Congress by the Republicans last November there would be some genuine effort to control deficit spending, with the passage of the balanced budget amendment. But that failed its first test in the Senate in February.
With that defeat the markets increasingly have begun to concentrate on the huge build-up of global debt. In 1980 the level of US dollar debt amounted to 35.5 per cent of its total wealth. That figure has now reached 56.6 per cent of annual wealth - much of which is being shipped overseas. The fiscal deficit is still growing at $200 billion a year with much of this financed internationally.
This year, however, there have been strong indications of a fundamental shift in attitude towards these dollar holdings. The biggest investors in US debt have been Japanese financial institutions which have taken on dollar debt in exchange for trade flows, which for the last 15 years have been in Japan's favour.
There are now strong indications that Japanese institutions are starting to repatriate some of those dollar holdings. Instead of replacing them with new US securities as they mature, the funds are being reinvested in a broader range of currencies. This, if it were to continue unchecked, could keep the dollar in secular decline for years to come.
The attitude of global investors towards the dollar has not been helped by American policy statements. Intervention in support of the US currency has been viewed as at best half hearted and the Clinton administration and Dr Alan Greenspan, chairman of the Federal Reserve, are against raising interest rates much further because of concern that this could damage the US recovery and turn what is being seen as a 'soft landing', in which the economy gradually slows as it comes off the boil, into a 'hard landing' which will signal a return to recession.
All of this has combined to remove the allure of the dollar among international investors. So far this year, it has already lost almost 10 per cent in value against the mark and a smaller amount - some 7 per cent - against the yen.
This represents a substantial devaluation for the dollar. If sustained, as seems likely, this could have a dramatic impact on the airline industry. For many, the immediate consequence will be one of extreme relief.
A weaker dollar should provide a substantial short term boost to cost structures, although there may well be a foreign exchange offset to US carriers, British Airways and those from southern Europe which price in the softer currencies. The beneficiaries clearly will be the hard currency carriers, most notably Lufthansa.
The US devaluation could also dramatically affect traffic flows for the rest of this year. It is likely to put a severe dampener on outward US traffic to Europe and the Pacific. On the other hand it confirms America's position as the West's bargain basement. Carriers plying the long haul Atlantic and Pacific routes could be major gainers as the US re-emerges as the world's most attractive tourist and business destination.
Source: Airline Business
