By Krishna Guha @ FT
When finance ministers and central bank governors met in Istanbul this month amid angst about the declining dollar, Tim Geithner was anxious to impart a basic message. “We recognise the dollar’s important role in the system conveys special burdens and responsibilities on the US,” the Treasury secretary told journalists. “And we’re going to do everything necessary to sustain confidence.”
Since then the greenback has continued to slide – falling to a 14-month low last week – provoking cries of pain from policymakers in the eurozone and elsewhere. Jean-Claude Trichet, president of the European Central Bank, said last Thursday that it was “extremely important” that the US follow policies that support a strong dollar – saying excessive currency volatility was an “enemy”.
For those who have long feared that the financial crisis – which has dented confidence in US economic leadership, capital markets and public finances – might end in a dollar crisis, this is a dangerous moment. With fear of global meltdown receding, the dollar is no longer supported by safe haven flows – investors taking refuge in low-risk and highly liquid US Treasury bills. But the daunting job of putting the US economic house in order again has barely begun.