U.S. Dollar Provides Stability in Financial Storm

The U.S. financial crisis has triggered numerous announcements that crashing markets signal the inevitable decline of the United States as the world's major power.

For example, the anti-American blog, Newshoggers, announced in September that the international system was becoming "more multi-polar, with the U.S. losing its superpower status as the world's financial powerhouse."

That's wishful thinking, of course (the anti-American left sees U.S. power as the font of evil in the world, and increasing multipolarity will rein-in America's alleged neoimperial project). The U.S. will remain the world's dominant economic power as long as no other states possess comparable economic capabilities.

One of the best indicators of a nation's power is the role of its currency. For over half a century, the U.S. dollar has been the world's major international unit of exchange, providing liquidity to countries facing balance of payments problems and serving as the unit of worth to which all the world's money aligned. Even after the collapse of the Bretton Woods system in 1971, the dollar served as the key currency of international trade, and at this late date over 80 percent of world's commercial and financial transactions are conducted in dollars.

Counterintuitively, as the American economy continues to shake out, international investors have been rushing into dollars as a safe-haven against risk. The Wall Street Journal has the report, "The Dollar Powers Through the Turmoil":

Amid the worst financial crisis in decades, the U.S. dollar has come roaring back to life.

Over the past four months, as investors around the world fled from risk, the dollar recouped more than two years' worth of losses against a broad group of currencies, including its swoon in the early part of this year.

Since the start of August, the dollar has strengthened 23% against the euro, 34% against the British pound, and still more against some currencies in developing countries ....

To the surprise of many observers, the greenback turned out to be a major beneficiary of the global flight from risky assets and the unwinding of bets based on borrowed cash, much of it in dollars. In a time of extreme financial stress, investors sought the relative safety of the world's reserve currency, and if possible, U.S. Treasury bonds.

The ever-widening scope of the crisis also helped the buck: It rapidly became clear that the U.S. is far from the only country with economic woes and hobbled banks.

For investors, the dollar's resurgence is proving a tricky puzzle. Some believe that the comeback will prove to be short-lived, given the enormous challenges facing the U.S. economy. But others say it's likely to endure well into next year as economies around the globe grapple with a sharp slowdown.

Read the whole thing, here.

The piece includes the usual discussion of the pros and cons of a rising dollar on exports and tourism. But what's fascinating is how this type of commentary is not much different from earlier times, whether the U.S. economy was booming or wheb facing a recession.

For America's detractors, the shift to a "multi-polar" world may have to wait a little longer.