After two smugglers were stopped last week with what at first appeared to be $134bn in US state bonds, the tension and paranoia surrounding the fate of the dollar hit a new high.
How on earth did these two men, who at first refused to identify themselves, come to be there, trying to ride the train into Switzerland carrying bonds worth more than the gross domestic product of Singapore? If the bonds were genuine, the pair would have been America's fourth-biggest creditor, ahead of the UK and just behind Russia.
In the event, late last week American officials confirmed that the notes were forgeries. The men, it appeared, were nothing more than ambitious scamsters. But many remain unconvinced. And whether fake or otherwise, the story underlines one important point about the world economy at the moment: that the tension and paranoia surrounding the fate of the US dollar has hit a new high. It went to the heart of the big question: will the central bankers in Japan, China and elsewhere continue to support the greenback even in the wake of the worst financial crisis in modern history, or will they abandon it as America's economic hegemony dissipates?
First came a paper from Zhou Xiaochuan, the governor of the People's Bank of China (PBoC), a couple of months ago, positing the idea of introducing the special drawing right (SDR) – a kind of internal currency at the International Monetary Fund (IMF) – as an international reserve currency. These calls were then repeated, with more force, by the Russian president, Dmitry Medvedev, who last week declared that the world needed new reserve currencies in addition to the dollar.
And this time around, the dollar is most certainly suffering. Since 2002 its trade-weighted strength – calculated against a basket of other currencies – has fallen by more than a quarter, from 112 to 81 points. In the same period, the proportion of dollars held by reserve managers in leading central banks has also taken a dive. According to figures from the IMF, confirmed holdings of dollars in government vaults, from Beijing and Tokyo to London and Paris, fell from 71pc of reserves to 64.5pc between 2002 and 2008.
If there were a textbook list of actions one could take to weaken a currency, the US (alongside most other developed nations) would be following it to the letter. It has cut interest rates to a whisker above zero; it has engaged in quantitative easing, pumping cash directly into the economy; it has committed to spending trillions of dollars on a fiscal stimulus package designed to pull the country out of recession; it has pledged tacitly to support its stricken banks so that no major institution is allowed to collapse. In any normal circumstances, actions like these would hammer a currency.
Neil Mellor, of Bank of New York Mellon, said: "We've got a situation where Geithner is smiling and has no choice but to stress the credibility and stability of the US financial and economic system, while the creditors [such as the Chinese] smile back and say they believe him, while at the same time giving hand signals to their reserve managers to get rid of these things."
How on earth did these two men, who at first refused to identify themselves, come to be there, trying to ride the train into Switzerland carrying bonds worth more than the gross domestic product of Singapore? If the bonds were genuine, the pair would have been America's fourth-biggest creditor, ahead of the UK and just behind Russia.
In the event, late last week American officials confirmed that the notes were forgeries. The men, it appeared, were nothing more than ambitious scamsters. But many remain unconvinced. And whether fake or otherwise, the story underlines one important point about the world economy at the moment: that the tension and paranoia surrounding the fate of the US dollar has hit a new high. It went to the heart of the big question: will the central bankers in Japan, China and elsewhere continue to support the greenback even in the wake of the worst financial crisis in modern history, or will they abandon it as America's economic hegemony dissipates?
First came a paper from Zhou Xiaochuan, the governor of the People's Bank of China (PBoC), a couple of months ago, positing the idea of introducing the special drawing right (SDR) – a kind of internal currency at the International Monetary Fund (IMF) – as an international reserve currency. These calls were then repeated, with more force, by the Russian president, Dmitry Medvedev, who last week declared that the world needed new reserve currencies in addition to the dollar.
And this time around, the dollar is most certainly suffering. Since 2002 its trade-weighted strength – calculated against a basket of other currencies – has fallen by more than a quarter, from 112 to 81 points. In the same period, the proportion of dollars held by reserve managers in leading central banks has also taken a dive. According to figures from the IMF, confirmed holdings of dollars in government vaults, from Beijing and Tokyo to London and Paris, fell from 71pc of reserves to 64.5pc between 2002 and 2008.
If there were a textbook list of actions one could take to weaken a currency, the US (alongside most other developed nations) would be following it to the letter. It has cut interest rates to a whisker above zero; it has engaged in quantitative easing, pumping cash directly into the economy; it has committed to spending trillions of dollars on a fiscal stimulus package designed to pull the country out of recession; it has pledged tacitly to support its stricken banks so that no major institution is allowed to collapse. In any normal circumstances, actions like these would hammer a currency.
Neil Mellor, of Bank of New York Mellon, said: "We've got a situation where Geithner is smiling and has no choice but to stress the credibility and stability of the US financial and economic system, while the creditors [such as the Chinese] smile back and say they believe him, while at the same time giving hand signals to their reserve managers to get rid of these things."
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