the future of the u.s. dollar: various scenarios

THE FUTURE OF THE U.S. DOLLAR:THE FUTURE OF THE U.S. DOLLAR:VARIOUS SCENARIOSVARIOUS SCENARIOS

Alex Kondonassis, University of OklahomaA. G. Malliaris, Loyola University ChicagoChris Pavaskevopoulos, York University,

APF/LUC Conference

January 4, 2007

OUTLINEOUTLINE

1. Brief Evaluation of the Current Global Monetary System

2. Discussion of its Successes and Weaknesses

3. Role of Financial and Real Factors

4. Possible Future Scenarios

EVALUATION OF THE GLOBAL EVALUATION OF THE GLOBAL MONETARY SYSTEMMONETARY SYSTEM

• Emphasis on Flexible Exchange Rates

• Emphasis on Independent Monetary Policies

• Promotion of Financial Integration and Capital Mobility

LESSONS LEARNEDLESSONS LEARNED

• Global Financial Instabilities

• Role of IMF

• Search for a NEW Financial Architecture

WHERE ARE WE NOW?WHERE ARE WE NOW?

1. U.S. Economy and the Dollar

2. EU and the Euro

3. Japan, China, India and Other Economies

4. NAFTA

GLOBAL MONETARY SYSTEMGLOBAL MONETARY SYSTEM

1. Role of Major Currencies

2. Dollar, Euro, Yen

3. Other

JAPANESE YENJAPANESE YEN

Source: www.barchart.com

EUROEURO

Source: www.barchart.com

BRITISH POUNDBRITISH POUND

Source: www.barchart.com

SWISS FRANCSWISS FRANC

Source: www.barchart.com

RENMINBIRENMINBI

DETERMINANTS OF DETERMINANTS OF CURRENCY IMPORTANCECURRENCY IMPORTANCE

1. Size of the Economy : GDP/ Population

2. Size of Financial Markets : Equity, Bonds, Real Estate

3. Depth of Foreign Currency Markets: FX Turnover

4. Economic Fundamentals: Growth, Employment, Inflation

EU, US and JAPANEU, US and JAPANKey Statistics for 2004

Characteristics Unit Euro Area United States Japan

Population Millions 309.7 294.0 127.6

Gross GDP $ trillions 9.07 12.24 3.96

GDP (share of world GDP) % 15.3 20.9 6.9

GDP per capita $ thousands 29.28 41.64 31.08

Unemployment Rate % 8.8 5.5 4.7

General Government Surplus(+) or deficit (-)

% of GDP -2.7 -4.4 -7.0

Gross debt % of GDP 70.6 48.7 149.2

Exports of Goods and Services % of GDP 19.5 9.8 13.6

Imports of Goods and Services % of GDP 17.8 15.0 11.6

Current account balance % of GDP 0.6 -5.7 3.7

Source: www.worldbank.com

Key Potential Economic PartnersKey Potential Economic PartnersYear 2004Year 2004

CountriesPopulation in

millionsTotal GDP in billion of USD

Exports in % of

GDP

Imports in % of

GDPSurplus(+)/deficit (-) as

% of GDP

China 1296.2 1931.7 34 31.4 2.6

India 1079.7 691.2 19.1 22.5 -3.6

Brazil 183.9 604.0 18 13.4 4.6

Mexico 103.8 676.5 30.1 31.9 -1.8

England (UK) 59.9 2124.4 24.7 28 -3.3

Argentina 38.4 153.0 25.3 18.1 7.2

Canada 32.0 978.0 34.4 30.4 4.0

Australia 20.1 637.3 17.6 20.6 -3.0

Chile 16.1 94.1 36.3 29.6 6.7

New Zealand 4.1 98.9 29.1 28.9 0.2

Source: www.worldbank.com

Reserve Currency HoldingsReserve Currency Holdingsoriginal IMF dataoriginal IMF data

1977-2002 data, updated IMF Internal data

Reserves held by central banks as Reserves held by central banks as shares of total – major currenciesshares of total – major currencies

(revised IMF data spliced into old data after 1979) 5/2/05(revised IMF data spliced into old data after 1979) 5/2/05

Source: Frankel(2005)

ADVANTAGES TO A COUNTRY OF HAVING ITS ADVANTAGES TO A COUNTRY OF HAVING ITS CURRENCY PLAY A LARGE ROLE IN THE WORLD CURRENCY PLAY A LARGE ROLE IN THE WORLD

1. Convenience for its residents

2. Business for its banks & other financial institutions

3. Seignorage more broadly as the willingness of private investors to hold $-denominated assets: America’s “exorbitant privilege”

4. Political power and prestige

FUTURE SCENARIOSFUTURE SCENARIOS

1. Dollar weakens & Euro strengthens

2. Dollar + Pound

3. Dollar + Pound + Australian Dollar

4. Dollar and NAFTA and Japan

Disciplined Decline in the Dollar andDisciplined Decline in the Dollar andAppreciation of the Euro at 10% annual rateAppreciation of the Euro at 10% annual rate

Euro and UK entry Euro and UK entry vs.vs. US and Partners US and PartnersVarious ScenariosVarious Scenarios

0

ROLE OF RENMINBIROLE OF RENMINBI

1. Review of Past

2. Possible Scenarios

CONCLUSIONSCONCLUSIONS

1. Currency volatility is expected to continue

2. U.S Dollar will be challenged by Euro

3. Political, Economic and Military Conditions are important