A dealer counts hundred-dollar bills at a money changer in Singapore. The dollar recently plunged to a record low against the euro and to its weakest level in 12 years against the yen.
The yen, euro and pound have taken long strides past the dollar in recent weeks. Wall Street Journal reporter Craig Karmin says it's a story that shouldn't be seen as a surprise — or a reason to forecast doom for the U.S. economy.
The dollar's hundred-year rise was dizzying, according to Karmin, author of the new book The Biography of the Dollar. He says that at the turn of the 20th century, despite the fact that America had one of the planet's largest economies, "and yet no one outside North America used the dollar." It wasn't until after World War I, when battered European powers first started borrowing from the United States, that dollars began circulating worldwide. By 1944, with the passage of the Bretton Woods international monetary agreement, he says the dollar was the only world currency pegged to gold. As a result, all other currencies were pegged to the dollar.
"In a span of just 44 years," Karmin says, "[the dollar] went from being used nowhere, to being more widely used than any currency ever before it."
Karmin recounts that the dollar remained dominant until its peak in the 1990s, when the U.S. was suddenly the world's only superpower. Post-Soviet nations freed from the Russian ruble saw the dollar as their passport to capitalism. "You had the dollar, which had already been the main currency of the free world, suddenly saw its use go up tremendously," he says.
But in 1999, the world saw the introduction of the euro, which Karmin calls the first credible alternative to the dollar. "It was just a matter of time," Karmin says, until the dollar would begin to decline as emerging market nations and established Western powers considered other kinds of currency.
It's probably unlikely, Karmin says, that the dollar will be the world's dominant currency again anytime soon. But he says it's also unlikely to remain in the dumps for much longer.
Karmin says currency cycles tend to last about five to seven years. "We're now in year number six of this one," he says. "When it turns, it could turn quite quickly." And the chance that Americans can again look across the Atlantic for affordable vacations? "I think by 2009, you might be talking to your travel agent about Europe," Karmin says.