Dynamic dollar rolls as world's top tender

The "almighty dollar" is proving to be mighty mighty.

No other currency is seriously challenging the occupancy of the world's money throne by the United States dollar.

Since the euro was formed at the start of 1999, this combined currency of 11 European nations, has fallen 16 percent in value against the dollar. Last week, the euro was worth about 99 American cents. When launched, it was billed as a threat to the dollar.

The euro's fall has "become a cause for concern with regard to future price stability," said Wim Duisenberg, president of the European Central Bank. To counter that threat, the bank slightly raised its key interest rate Feb. 2 to 3.25 percent.

Ecuador, deep in financial trouble, decided Jan. 9 to replace its sucre with the US dollar. President Jamil Mahuad figured the plan would lure back investors and restore confidence.

Within days, Mr. Mahuad was overthrown in a military-backed coup. His replacement, Gustavo Noboa, said he would continue with dollarization. But the sucre would be pegged to the dollar rather than replaced.

Then East Timor announced it would dollarize until it achieved full independence. It too hopes to revive a battered economy.

Altogether, 13 nations give the US dollar exclusive or predominant status as full legal tender.

Panama did back in 1903.

After a long period of hyperinflation after World War II, Argentina decided to back every peso with a dollar and guarantee convertibility. The dollar is now the main currency in circulation.

Hong Kong also pegs its currency to the dollar. Dollarization is discussed in El Salvador, Mexico, Costa Rica, and several other Latin American nations. Usually, proponents of dollarization hope to avoid the mismanagement of their currencies that has caused much economic damage.

In some 52 countries, people hold much of their wealth in foreign assets, primarily dollars. Indeed, two-thirds of American currency is held by foreigners.

What may be less well known is that Canada is rapidly embracing the US dollar. This is what economist Thomas Courchene of Queen's University in Kingston, Ontario calls "market dollarization." Official US dollarization is not popular among politicians in nationalistic Canada. Most favor the present floating exchange rate of the US and Canadian dollars since this cushions big changes in the prices of commodities that Canada exports.

Yet many Canadian high-tech firms keep their books in US dollars and Canadian dollars, worth about 69 US cents. They list shares on US stock exchanges, primarily NASDAQ.

Canadian banks offer credit cards denominated in US dollars, as well as cards in Canadian dollars. Salaries of some top Canadian corporate executives are cited in US dollars.

The players - and the referees - in major Canadian sports teams are paid in US dollars.

A minority of Canadian economists - perhaps 10 in all - argue that Canada should take private dollarization further and seek a North American monetary union that might embrace Mexico as well. They talk of an "amero" that would be something like the euro.

In November, economist Lawrence Kudlow called for locking the dollar, euro, and yen on a one-to-one basis.

"Couldn't be easier for investors, market traders, corporate treasurers, electronic shoppers, importing consumers, and exporting producers," he said on CNBC. "Everyone benefits."

It didn't happen, of course.

For Canada, an amero would lower interest rates, stimulate trade, and bring greater price stability, proponents say. It would recognize the integration of the US and Canadian economies.

Herbert Grubel, an economist at the Fraser Institute in Vancouver, British Columbia envisages a North American Central Bank. The three nations would hold seats on the board. The US would keep control.

Bank notes and coins of the amero would have a common symbol on one side and national emblems on the other to preserve symbols of national identity.

Each country would share in the seignorage - the huge profits from issuing new currency.

Canadian sovereignty would be little affected, Mr. Grubel argues. Canada wouldn't have a central bank. But for years, that bank has usually followed American monetary policy anyway.

Both Grubel and Courchene have doubts whether the US could go along politically with a monetary union.

But Grubel nevertheless says Canada should ask the US "to work with us." If the euro gets off the ground and starts to win world influence, he figures, then the US dollar will need allies.

(c) Copyright 2000. The Christian Science Publishing Society

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