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By Luca Di Leo
DOW JONES NEWSWIRES WASHINGTON (Dow Jones)--The U.S. dollar will still be the world's dominant currency for at least the next decade, said three former top officials at the Federal Reserve, including former Fed Vice Chairman Donald Kohn. In separate interviews, Kohn and former Fed Governors Laurence Meyer and Randall Kroszner stressed that forecasting currency rates is often akin to reading entrails. But they still offered some well-educated guesses of what could happen in foreign exchange markets in 2011.
1. The euro-dollar exchange rate will end up around the current $1.35 level at the end of the year.
2. The Chinese yuan could appreciate at a stronger pace against the dollar in 2011 compared to previous years amid government efforts to keep inflation under control, but investors must be aware that this is a risky bet.
3. There will be no U.S. sovereign debt rating cut this year, even though the country's fiscal woes could weigh on the dollar slightly.
4. The U.S. dollar is likely to continue getting a boost from the protests in Egypt as investors flock to its perceived safety, but the longer-run consequences from unrest in the Middle East are harder to predict -- and could be dire.
"The dollar will continue to be a reserve currency for decades to come," said Kohn, who retired in September 2010 after 40 years at the U.S. central bank. Meyer, 66 and a member of the Fed's Board of Governors from 1996 to 2002, is certain the dollar will still be the dominant currency in his "lifetime" because there are no valid alternatives.
Kroszner, a University of Chicago professor who was a member of the Fed board from 2006 to 2009, was the only one of the three to underline the potential challenge to the U.S. from China within the next 10 years, but noted it will be hard for China to win investors' confidence by liberalizing capital markets and improving the rule of law.
Given the large and rapidly growing size of the Chinese economy and the country's enhanced role in world trade, the yuan is seen by some observers as a plausible candidate for reserve-currency status like the dollar and the euro -- albeit in the distant future. The U.S. dollar's share of global foreign-exchange reserves stood at 62.2% in 2009, according to the International Monetary Fund. The euro was second with 27.3%.
Kohn, now at the Brookings Institution think tank in Washington, said if he were a reserve manager, he'd be "cautious with the euro right now" given the ongoing sovereign debt woes in the continent. But he believes Europe's single currency will still be around in a couple of decades because the political will to make it survive is very strong.
Asked where he sees euro-dollar at the end of 2011, Kohn said "around current levels." The euro moved higher Monday, just below $1.37, as investors speculated that rising euro-zone inflation will soon lead to higher interest rates in the 17-nation currency bloc. Given currencies are so hard to predict, the best guess is to take the current rate, Kohn said.
Meyer, now a private forecaster and consultant at Macroeconomic Advisers, reached the same conclusion, but offered an explanation: The dollar should benefit against the euro because the U.S. economy will grow twice as fast as Europe's this year. But that will be offset by the inflatio-wary European Central Bank raising rates before the Fed does, making euro zone assets more attractive. Kroszner subscribed to this view, predicting the euro will end the year in the "$1.30-$1.40 range."
"I'd favor currencies that are being held down artificially" such as the yuan, Kohn said. "But you'd have to find a way around capital controls," he added. To prevent inflation from spiking higher, China will likely tighten monetary policy this year and let its currency move higher, he said. Kroszner also saw this as a likely outcome, but cautioned it's a "risky bet" because the currency appreciation in China could turn out to be "disorderly."
The U.S. dollar may come under pressure later this year if no steps are taken to reduce the country's high public debt, but rating agencies likely won't cut the U.S. sovereign debt rating -- and no fiscal crisis is anticipated this year by the three former central bank officials.
Kohn said is cautiously optimistic that some "baby steps" will be taken in 2011 to address the U.S. fiscal woes, such as raising the retirement age. Meyer was more pessimistic and warned: "If the problems get solved in Europe, then attention will turn to the U.S."
Once the flight-to-quality boost to the dollar from the Egypt protests end, it's anyone's guess what will happen to currencies next from Middle East developments. Kohn offered one dire prediction: If the revolts spread and bring about Islamic rule similar to Iran's in several Arab countries, that would lead to a sharp rise in oil prices -- which would hurt the U.S. economy and the dollar.
-By Luca Di Leo, Dow Jones Newswires; 202-862-6682; luca.dileo@dowjones.com
DOW JONES NEWSWIRES WASHINGTON (Dow Jones)--The U.S. dollar will still be the world's dominant currency for at least the next decade, said three former top officials at the Federal Reserve, including former Fed Vice Chairman Donald Kohn. In separate interviews, Kohn and former Fed Governors Laurence Meyer and Randall Kroszner stressed that forecasting currency rates is often akin to reading entrails. But they still offered some well-educated guesses of what could happen in foreign exchange markets in 2011.
1. The euro-dollar exchange rate will end up around the current $1.35 level at the end of the year.
2. The Chinese yuan could appreciate at a stronger pace against the dollar in 2011 compared to previous years amid government efforts to keep inflation under control, but investors must be aware that this is a risky bet.
3. There will be no U.S. sovereign debt rating cut this year, even though the country's fiscal woes could weigh on the dollar slightly.
4. The U.S. dollar is likely to continue getting a boost from the protests in Egypt as investors flock to its perceived safety, but the longer-run consequences from unrest in the Middle East are harder to predict -- and could be dire.
"The dollar will continue to be a reserve currency for decades to come," said Kohn, who retired in September 2010 after 40 years at the U.S. central bank. Meyer, 66 and a member of the Fed's Board of Governors from 1996 to 2002, is certain the dollar will still be the dominant currency in his "lifetime" because there are no valid alternatives.
Kroszner, a University of Chicago professor who was a member of the Fed board from 2006 to 2009, was the only one of the three to underline the potential challenge to the U.S. from China within the next 10 years, but noted it will be hard for China to win investors' confidence by liberalizing capital markets and improving the rule of law.
Given the large and rapidly growing size of the Chinese economy and the country's enhanced role in world trade, the yuan is seen by some observers as a plausible candidate for reserve-currency status like the dollar and the euro -- albeit in the distant future. The U.S. dollar's share of global foreign-exchange reserves stood at 62.2% in 2009, according to the International Monetary Fund. The euro was second with 27.3%.
Kohn, now at the Brookings Institution think tank in Washington, said if he were a reserve manager, he'd be "cautious with the euro right now" given the ongoing sovereign debt woes in the continent. But he believes Europe's single currency will still be around in a couple of decades because the political will to make it survive is very strong.
Asked where he sees euro-dollar at the end of 2011, Kohn said "around current levels." The euro moved higher Monday, just below $1.37, as investors speculated that rising euro-zone inflation will soon lead to higher interest rates in the 17-nation currency bloc. Given currencies are so hard to predict, the best guess is to take the current rate, Kohn said.
Meyer, now a private forecaster and consultant at Macroeconomic Advisers, reached the same conclusion, but offered an explanation: The dollar should benefit against the euro because the U.S. economy will grow twice as fast as Europe's this year. But that will be offset by the inflatio-wary European Central Bank raising rates before the Fed does, making euro zone assets more attractive. Kroszner subscribed to this view, predicting the euro will end the year in the "$1.30-$1.40 range."
"I'd favor currencies that are being held down artificially" such as the yuan, Kohn said. "But you'd have to find a way around capital controls," he added. To prevent inflation from spiking higher, China will likely tighten monetary policy this year and let its currency move higher, he said. Kroszner also saw this as a likely outcome, but cautioned it's a "risky bet" because the currency appreciation in China could turn out to be "disorderly."
The U.S. dollar may come under pressure later this year if no steps are taken to reduce the country's high public debt, but rating agencies likely won't cut the U.S. sovereign debt rating -- and no fiscal crisis is anticipated this year by the three former central bank officials.
Kohn said is cautiously optimistic that some "baby steps" will be taken in 2011 to address the U.S. fiscal woes, such as raising the retirement age. Meyer was more pessimistic and warned: "If the problems get solved in Europe, then attention will turn to the U.S."
Once the flight-to-quality boost to the dollar from the Egypt protests end, it's anyone's guess what will happen to currencies next from Middle East developments. Kohn offered one dire prediction: If the revolts spread and bring about Islamic rule similar to Iran's in several Arab countries, that would lead to a sharp rise in oil prices -- which would hurt the U.S. economy and the dollar.
-By Luca Di Leo, Dow Jones Newswires; 202-862-6682; luca.dileo@dowjones.com
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