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he U.S. dollar tumbled to a four-year low against the euro Thursday, as weak economic data, low interest rates and the ballooning U.S. deficit spurred investors to continue seeking higher yielding currencies elsewhere in the world.
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The euro surged to $1.1230 on Thursday, up from $1.1100 on Wednesday, pushing it to within about 5 cents of the level at which the single currency was introduced in January 1999 but had never regained in the four years of its existence. The dollar has plunged 2.5 percent against the euro this week alone.
Well this is rather sudden, the Euro regained all the value lost in one year comparing to three years loosing streak before...
Why is the position of the key currency so important? According to specialist in global money flow, Masayuki Kichikawa, Senior Economist and Chief of Nomura Research Institute's International Financial Research Group, "The United States occupies by far the largest share of both global trade and foreign currency reserves, which means that other countries are forced to ensure that their own currencies trade at stable rates against the US dollar. Because of this constant pressure, American financial and fiscal policy has the power to affect other countries as well. While it is hard to back this up with hard facts, it probably also explains the real reason for the dominance of the key currency in the broad sense." Mr. Kichikawa adds that nonetheless the influence of the United States has decreased in the case of Europe since the second half of the 1980s, when the EMS was de-linked from the dollar and went over to the German mark.
However, it may be too soon to expect the Euro to rapidly take the place of the US dollar as the world's key currency. Kiyoshi Tsugawa, Chairman of Lehman Brothers Japan, sees it as follows: "It is unlikely that America's strength as a nation will decrease to the extent that the Euro is able to take over, given the current vigour of the US economy compared with the situation when the US dollar took over from the pound sterling as the key global currency. Rather, the dollar and the Euro will be used in combination and that the Euro will emerge as a 'second key currency'."
Of course, there are others who feel that the United States is no longer able to interfere with Europe's advance. One person who subscribes to this view is Tatsuya Kubo, Manager of the Global Investment Management Department at SG Yamaichi Asset Management. He says, "A strong Europe is a threat to the United States and having been unable to prevent this, the US is trying to build up its authority in Asia. As far as I can see from America's policies on Asia, the US position is informed by the idea that if it can engineer a situation of economic crisis then it should be able to take over the reins of leadership politically as well." Mr. Kubo argues that the United States takes the same approach in its dealings with Japan. "The US is constantly calling for lower taxes and more government bond issues, and would be only too happy if Japan's budget deficit swelled to large enough proportions to cripple the Japanese economy."
Meanwhile, Nomura Research Institute's Masayuki Kichikawa said that an eminent US scholar had admitted that the benefits of being the key currency will only be appreciated once they are lost.
Can it happen can Euro take over in light of current US policies?
EU!
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