One argued that the US has probably been following a deliberately weak dollar strategy for some time, but rather unobtusively, and that with people like Lafontaine having greater influence in Europe, Europe is likely to try to follow a weaker Euro policy than it otherwise would. The result would be not competitive devaluation but a process whereby both currencies tend to be undervalued.
(This does not necessarily harm the role of international money, if I understand some of the implications of Chapter 3 of Capital correctly, on the centuries long skirmishing between gold and silver).
What do people think?
An article in the International Herald Tribune of Dec 19th argued that the Euro would be attractive to Japanese banks seeking to balance and diversify their reserves, now held mostly in dollars. [Although this might be irrational for the Japanese economy as a whole which needs a lower yen to export more, exports are only a small proportion of total Japanese production, and the banks although under serious threat, are still much more politically influential.]
Japan is the second largest holder of US Treasury debt after Britain at $265 billion. Heavy sales could force a rise in US interest rates when the opposite is needed.
In May Japanese investors bought $5.6 billion US medium and long term bonds and only $3.3 billion French and German bonds, combined. By October Japanese were net sellers of US debt but bought $7.8 billion French and German bonds. There is more than $2 trillion dollars available in Japan to move into the Euro. Analysts also estimate that 3/4 of the worlds foreign currency reserves in the vaults of Asia's central banks now sit in dollars.
Japan and China and other Asian countries may calculate that if they spread their bond holdings they reduce the risk of currency fluctuations. The depth of the Asian financial crisis was increased last year (1998) by the fact that most of their currencies were linked to the dollar, which appreciated markedly.
There are also geo-political factors. China has long signalled its intention to put a subtantial part of its reserves in Euros. The Japanese and other Asian countries may also feel a discontent for the domination and endless advice from the USA.
In terms of current accounts, Japan's surplus with the USA rose almost a third by comparison with last year. They have been tending to use it to buy US bonds. But if the Euro and the dollar get into competitive devaluation this may leave the yen overvalued, and with an even bigger trade surplus with the USA. Another reason for not relying on too many US bonds if economic hostilities sharpen this year.
Is this going to equilibrate smoothly, or could it accelerate into a crisis later this year? If so it might cause lasting damage to US hegemony.
Chris Burford
London.