Add Benjamin Franklin’s wink to the US dollar’s list of humiliations. The 18th-century American statesman is perhaps best-known in Asia for gracing the front of the $100 bill. Asians used to worry about counterfeit "Benjamins". Now, they’re frightened of the real thing. Since January 2008, 25 per cent of the dollar’s value has melted away versus the yen. Time for a redenomination? Japanese toy-maker Bandai certainly thinks so.
This week it unveiled "Bubbly Bubble Bath" dollar soap. It’s a paper-thin replica of the $100. Only, this one is a $1,000 bill. Just so the most gullible among us aren’t fooled, it features a winking Franklin — as if he’s in on the joke.
Comedians like David Letterman are increasingly working the dollar into their acts. That’s where the humour ends. It would be fun and games if not for an experience I had recently in Hanoi: Merchants were far less keen on taking my dollars than a year ago. It’s an important man-on-the-street sign of the dollar’s plight, one that may grow as Asian central banks protect their holdings.
Waning demand for dollars in places where it’s long been rock-solid can be seen among Vietnam’s eclectic gold speculators. When we think of gold gamblers, an image closer to George Soros often comes to mind. Stereotypes die fast when visiting one of Hanoi’s ubiquitous black-market areas. Housewives, many with toddlers in the arms, jostle to unload their dong and dollars for the safety of hard assets.
Think of this as ground zero of Asia’s fast-growing love affair with gold — and a sign the dollar’s stability this week won’t last.
The dollar was trading at 89.57 yen in Tokyo today, after reaching a 14-year low 84.83 on November 27. The ICE futures exchange’s Dollar Index has risen 1.2 per cent this week. Times were when Vietnamese merchants knocked one another over to get their hands on dollars. Today, the world’s reserve currency is under more pressure than ever as hedge funds begin wondering if Dubai will go the way of Iceland.
Few considered the economy of the tiny North Atlantic nation before it collapsed last year. It sent shockwaves around the globe and had investors scrutinising Asia for economies similarly run like national hedge funds. At the time, many investors homed in on South Korea, which was thought to be overexposed with too much short-term debt.
Korea turned out to be fine. Many wouldn’t say the same thing about Vietnam these days. On December 8, for example, Nomura Holdings Inc said Vietnam has the makings of a "classic" emerging-market crisis and investors should buy protection against a sovereign default.
At the time of the Nomura report, investors in emerging- market debt had earned about 26 per cent this year as the world recovered from the worst global recession since World War II, according to a JPMorgan Chase & Co. index. Dubai’s troubles fuelled concern that emerging-market returns mask difficulties in specific nations.
News last month that Dubai World was attempting to reschedule debt shook investors. Many worried it was a harbinger of a blowup in emerging markets.
Fears are easing a bit. Dubai this week got a $10 billion bailout from Abu Dhabi. Kuwait said it’s willing to provide financial help to the United Arab Emirates. Yet investors aren’t convinced Dubai will meet all of its obligations. After all, its cash needs haven’t vanished. Considerable debt still needs to be settled in 2010 and 2011.
Dubai’s significance, like Iceland’s, far exceeds its economic size. The entire UAE economy is $163 billion, roughly the size of the Philippines. It’s more about what it says about the state of credit markets.
The new subprime
The extent to which they are still in disarray can be seen in how Dubai’s straits affected risk appetites near and far. Investors, worried that sovereign debt is the new subprime, quickly shunned assets like stocks, commodities and the dollar.
The dollar has stabilised since the initial Dubai shock, as authorities acted to reassure investors and US data showed signs of life. Yet markets remain on guard for the slightest hint of renewed trouble. Consider this a pause in a broader trend toward a weaker dollar.
Hence the frenetic demand for gold in places like Hanoi. The precious metal lost favour in Asia a decade ago, just after the region’s 1997-1998 crisis. Then, the focus was on hoarding dollars to protect economies from market turbulence and weakening local currencies to help exports.
The process was called "Bretton Woods II" and featured an unofficial dollar peg. Why warehouse bars of gold when you can stockpile dollars digitally? Now, India’s $6.7 billion gold purchase from the International Monetary Fund last month has markets buzzing about the evolution of a "Bretton Woods III."
Few countries are likely to go as far as establishing the kind of strict gold standard that US President Richard Nixon scrapped in 1971. Yet expect gold to take on a growing share of central banks’ reserves as a hedge against turmoil in markets.
The effort to find a new reserve currency is a long-term project. True, with zero US interest rates, a massive and rising debt and a low national savings rate, the dollar hardly screams "reserve currency." There’s no easy alternative, though. That helps explain the modern-day gold rush unfolding in capitals around the globe.
It also explains why, Benjamin Franklin’s wink aside, the dollar’s woes are anything but amusing.
©2009 Bloomberg News Service