Dilemmas of the Dollar

Our sacred dollar, reigning deity of the world’s currencies, has able prophets and apostles. And it needs them. Though it has soared this past decade, the dollar now faces rising domestic and global forces that seek to humble it. Do the challenges matter? Yes, but far more to the new economy than to the old one of industry and exports. The old one liked a humbler, cheaper dollar, nice for exports. The new economy needs a dollar strong enough to buy up the mountains of cheap imports that keep consumers happy, inflation low, and the economy growing. It also needs a dollar strong enough to lure from abroad the huge flow of capital that helps pay for these imports and, again, for a surging economy. When the surge slows down, however, the strategy of delivering the previously unheard-of combination of low inflation plus low unemployment is challenged.

This much-applauded strategy, fine tuned by its makers, has led us closer to a full-employment economy than we’ve been in half a century, a journey about which we can surely rejoice—never mind the quality of jobs, the turmoil, the costs of rising inequality. The question is, will the strategy continue to work? On the downside, at the command of the U.S. Supreme Court, we have lost the team that devised the game, knew its rules, and might have improvised ways to keep winning it. Now the game appears far harder than even, say, championship chess, given the incipient weakness of both the dollar and the new economy—and also the sharp conflict between the two for the favors of the Federal Reserve Board. It is doubtful that even a wealth of charming smirks from the Oval Office will give us the answers we need.

Three references to the dollar’s “affairs,” as I call them, might give us some sense of the setting in which the dollar—a truer emblem of the nation’s strength than the stars and stripes—may be humbled and some of the forces that may do it. The three affairs involve (1) competing currencies and backlash from our own multinationals; (2) indebtedness, global and domestic; and (3) distress in financial markets (securities and banking) and in the “fundamentals” of the real economy.

The Euro Affair

The dollar’s enduring romp with the euro has shown both its global power and its emerging fragility. The euro was poised by its makers to challenge the dollar as the world’s leading currency, or at least to become a sturdy second; but by the new millennium, it had taken an almost fatal fall of 30 percent since its birth date. The dollar did not rush to pick it up.

Predictably, Clyde Summers, then treasury secretary and able lifeguard of the dollar, said “no” to helping revive the euro and an emphatic “yes” to letting it plumb its lower depths. A rescue might have endorsed the euro as a safe harbor for investments, perhaps safer and better than the dollar, and that would not do. A strong dollar, as Summers said, “is in our nationa...