All across the world, the British Pound has lost about 1.5% against the U.S. Dollar over the past week. Are you concerned that your dollar might soon fall further against the British Pound? If so, you might be worried about the future of the US Dollar as the currency of the Euro Area.
One expert tells us that the crisis is brewing and we need to take note of it. His name is Professor of Economics, Dr. William Scott MacDonald, and the title of his article is, “The Currency Crisis and the Euro: Something New is Ahead?” He says that the financial turmoil and the financial policy problems in Europe are all part of a much larger set of problems that has developed over the past decade or more that he calls “Euro Centralization.”
He explains that this issue is not just the European Central Bank (ECB) and they are merely the most recent players in a very big game. He says that the Euro has no meaningful exit policy and the European banks have no capability to transfer funds out of the Euro area without breaking the rules. As a result, the European banks are forced to follow the rules of the Euro region and are therefore unwilling to exit the Euro for fear of losing access to European markets.
He says that the problems are related to the fact that there is a one-size-fits-all policy for the Euro but there is no such thing for the US Dollar. He says that the US Dollar and the Euro are different currencies. According to Dr. MacDonald, the reason why there is so much concern is that the Euro countries are using an exit strategy to save the Euro and it will create a situation in which the Euro will not be able to function as the global reserve currency.
He explains that once the Euro exits, there will be a run on the Euro as investors fear that their wealth could be lost. This would cause capital flight, an economic collapse, and theEuro would likely fall below the level where it began. At that point, Dr. MacDonald says that the US Dollar would become the only reliable global reserve currency and it would probably continue to be the only one for many years to come.
This isn’t a time to panic, he says, but to take some time to think about what is to come. He says that this is a time to be grateful that the American dollar is still strong, but he cautions that we need to begin thinking about the possibility of a future in which we can no longer rely on the US Dollar. He says that the Euro can function like a good hedge against inflation, and thus we should welcome it.
Dr. MacDonald is absolutely correct, and I think that this is going to be a topic that people in Europe will need to think about over the next few years. One thing is for sure: the US Dollar is the anchor for the Euro and if it goes down, the Euro will also go down. So far, the Euro has not had any big market crashes, but if this continues, the weaker Euro is likely to lose its value and that could cause the Euro to become a currency that can be used to hedge against inflation.
This is why I have begun to recommend that people consider investing in the Euro when making purchases. People who think that they are going to profit from buying the Euro can read my recent post about it for another perspective. I think that investing in the Euro is a good thing, and I hope that the world does eventually move away from the US Dollar as a reserve currency.
In the meantime, while we have a developing story in Europe, back in the US, one of the most important parts of the story has been written. It was not just the U.S. Dollars but the British Pound that became so vulnerable during the last week. The reasons were the European Central Bank’s policy that is refusing to even consider the idea of a small return to the peg to the Dollar.
We should watch the British Pound as it rises and falls over the next few days, but the US Dollar rose and fell with the U.K. pound, so don’t look for one currency to be able to keep a lock on the other.