Don’t write off the dollar

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What is the impact of a declining dollar? Has the economic crisis really come to an end? Can we expect a new global economic order?

Thanh Nien Weekly asks Jonathan Larsen, head of Consumer Banking and Global Cards for Asia Pacific of Citigroup, these and other pressing questions during his recent visit to the HCMC Citigroup office.

The value of the dollar keeps sliding. What is the impact of a declining dollar?

Jonathan Larsen: It is premature to write off the US dollar. The dollar has surprised people many times with its strength over time. Why is that? Because it is still the world’s predominant reserve currency; there is always a demand for the dollar. And though the dollar’s value continues to fall, there really is not an alternative to the dollar as a reserve currency in the near future. The current low interest rates are one of the reasons for the dollar’s fall. But as the US economy starts stabilizing, the dollar will start to retrace its gains and eventually recover.

But how low do you think the dollar will go?

It may continue to decline in value in the short term. But the dollar has surprised us many, many times with its strength to recover.

Can any other currency replace dollar as a world reserve currency?

It is very unlikely for any currency to become an alternative to the dollar as a world reserve currency, in the short term.

Has the world economic crisis really come to an end, in particular, the US economic crisis?

The answer is no. We are still coming out of the crisis but can see the light at the end of the tunnel.

The US economic crisis appears to have three distinctive phases of development. The first phase was the capital market phase where we saw the collapse in valuation of instruments like CDOs and the crisis in delinquency, and decline in confidence amongst international institutions.

The second phase is the direct result of the fallout within the consumer sector, in particular, the default of consumer credit linking to the first phase.

The third phase of the crisis is in the commercial real estate sector. If you read, for example, the Wall Street Journal, every day you can see shopping malls or hotels close in the US. And that is still happening. We are seeing some funds coming back into this sector. But overall the crisis in this sector is still insolvency.

However, the most important point is that financial security has returned. We don’t have a liquidity crisis amongst the major banks and in the major economies anymore.

Is Vietnam still an attractive emerging market?

I think Vietnam is an extremely attractive market over the medium and longer term. Vietnam has a large and literate population, and it is rapidly industrializing. All these things are in favor of the Vietnamese economy over the medium to longer term.

Which is the most attractive emerging market in Asia?

It is very hard to ignore China and India because of the scale of the population, and also because of their strong manufacturing sector, and export competiveness.

Most global investors are feeling bullish again about East Asia. Why?

Things are very interesting in East Asia. Let’s take, for example, Singapore. The Singapore economy is one example of a dramatic falloff in export. Singapore exports were dropping as much as 40 percent in the first quarter of 2009. But we saw a very significant recovery in the second quarter by an impressive 20 percent. Some of that recovery is driven by demand for its major export product â€" electronics goods, especially from Europe and China.

So, while there are very strong signs of growth in parts of Asia, in Australia and a number of other countries around the world, the major consumption economy of the world â€" the US â€" is still in a very weak state. And it can take quite a long time to rebuild its demand. So I’m concerned about the long term sustainability of demand.

Do you foresee the risk of another crisis?

The global banks are standing behind their major financial institutions, and that is the most important step in avoiding another major crisis. So the risk of another financial crisis is very, very low.

The decline of American economic power linked to the current global recession was implicitly acknowledged by Robert Zoellick, the World Bank president. Are we going toward a change of world economic order?

Right now, I don’t think anybody knows what the answer is. The US is still the biggest economy in the world with a US$14 trillion GDP. It is still the largest consumption economy and the biggest manufacturing economy in the world. The US still has powerful forces of innovation in most of the areas of technology and in higher education. So, it is premature to write off the US.

I think the real question and the big question is at what point are we going to see an inflection in global demand? Can consumption in economies like China, rise in a meaningful way, and then will have the potential to bend the balance of demand on a global basis?

Once again, untold millions have been handed out in bonuses this year. What do you think of this?

Definitely, there were extravagant pay packages made in the past. Having said that, I think that, now, major global institutions, like Cathay and our company are taking a responsible approach. We are trying to make sure that the compensation is fair and competitive.

Reported by Ngoc Tran

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