Dollar down, euro up, so what

The U.S. dollar is still at the center of the world's financial system, and its importance isn't fading in the face of exaggerated claims to the contrary.

That reality has gotten lost as various commentators complain about the decline in the value of the dollar, particularly against the euro.

Nevertheless, the dollar continues to dominate foreign-exchange markets, U.S. financial markets are the world's deepest and most liquid, and Treasury securities remain the globe's premier risk-free investment.

And, of course, this country is a market second to none, to which foreign companies supplied more than $2.2 trillion worth of goods and services last year.

Ignoring all that, President Hugo Chávez, of Venezuela, jeered after a Nov. 18 meeting in Saudi Arabia of the heads of state of the Organization of Petroleum Exporting Countries: "The fall of the dollar is not the fall of the dollar — it's the fall of the American empire."

More seriously, though still off base, European Central Bank President Jean-Claude Trichet earlier this month described the dollar's decline against the euro as "brutal," saying such moves are "never welcome."

And on Nov. 7 French President Nicolas Sarkozy told Congress the U.S. must support the dollar or risk starting a trade war.

Trichet, who had complained many times about the need to address major global economic "imbalances," such as the large U.S. current account deficit, somehow overlooked that the euro-area countries had a $62.6 billion trade surplus with the U.S. in the first nine months of this year.

That surplus was down from $69.1 billion last year, and the decline in the dollar — which always had to be part of the process of adjusting those imbalances — undoubtedly has been a factor.

Sarkozy similarly overlooked the $1 billion increase in the U.S. deficit with France, which reached $10.2 billion over the same period. Trade war indeed.

What to do

And what does Sarkozy want this country to do to support the dollar?

The Federal Reserve isn't about to raise its target for the overnight lending rate — which it cut to 4.5 percent at the last meeting of the Federal Open Market Committee — to shore up the currency.

Of course, Sarkozy earlier had no luck arguing against a rate increase by the European Central Bank on the grounds that the euro was becoming too expensive.

As for jokes, one attempt really wasn't very funny. A cartoon by Mike Luckovich of The Atlanta Journal-Constitution reprinted in the Nov. 18 New York Times showed Treasury Secretary Henry Paulson, in the Oval Office with President Bush, asking, "Can I get paid in euros?"

Actually, Zodiac, Europe's biggest maker of airplane seats, would like to get paid in euros.

Zodiac sells both to Boeing and its European rival Airbus, the world's two largest makers of commercial aircraft.

Boeing, Airbus agree

It's hardly surprising Boeing insists on paying its suppliers in dollars. However, so does Airbus because so many of its own sales are priced in dollars.

The U.S. market is so important that many exporters to the U.S. routinely price their products in dollars and accept whatever currency risk that may involve.

In the current situation, many of the exporters are accepting lower profit margins to hold onto their market share. Zodiac's Chief Executive Office Olivier Zarrouati acknowledged in a Nov. 16 news conference that his company is among them.

The dollar is just as central to worldwide financial transactions.

For example, the dollar was involved in 86.3 percent of April's $3.1 trillion average daily turnover in foreign-exchange markets, according to a survey by the Bank for International Settlements.

The vaunted euro, supposedly everybody's newest favorite, was in only 37 percent of the transactions. The Japanese yen, whose importance is fading, was in 16.5 percent, closely followed by the British pound with 15 percent.

Because there are two currencies in each transaction, the sum of all the percentages is 200 rather than 100.

The focus on the cross rate between the dollar and the euro gives an exaggerated sense of the dollar's fall in value.

Check out the Federal Reserve's broad dollar index weighted according to U.S. trade with other countries and adjusted for relative inflation rates. That index has averaged 86.83 so far this month, which is an 8.4 percent drop from November 2006. The decline over the 12 months before that was 4.5 percent.

The dollar has gone down 14 percent against the euro in the past 12 months.

The recent decline in the index is hardly unprecedented. The index base is March 1973 when it equaled 100. Since 1990 it has been as low as 84.23 in July 1995 and as high as 112.84 in February 2002.

At the OPEC conference, Chávez and Iranian President Mahmoud Ahmadinejad argued that the group should consider pricing oil in a currency other than the U.S. dollar.

The talk didn't go anywhere, and even if OPEC were to switch — which it has discussed occasionally in the past — it's not clear what the impact would be.

If OPEC required payment in euros, a buyer would just trade the dollar for euros, then pay.

If the oil-exporting countries, which are accumulating large currency reserves, were to decide to hold more euro-denominated investments, they could do that easily without setting the oil price in euros.