A Dollar Collapse Will Hurt China
Letter to the Editor

Andy Xie's suggestion that an Asian loss of faith in the US dollar could soon lead to a dollar collapse overlooks two basic considerations ("If China loses faith the dollar will collapse", Comment, May 5).

The first is that for the dollar to collapse, it would need to do so against the euro and the Japanese yen, the world's two other major international reserve currencies. However, the likelihood of a dollar collapse against the euro would appear to be remote.

As the International Monetary Fund recently reminded us, the European banks are more than likely in worse shape than those in the US, while any substantial appreciation of the euro would only make it more difficult for Ireland and the eurozone's Mediterranean member countries, which are all already experiencing deep recessions, to cope with the discipline of the euro.

It is hardly in China's economic interest for the dollar to collapse.

The likelihood of the dollar collapsing against the Japanese yen would appear to be even more remote given Japan's horrendously poor public finances and the fact that a stronger yen would only add to the deflationary pressure already in evidence on a rapidly contracting Japanese economy.

The second consideration overlooked by Mr. Xie is that it is hardly in China's economic interest for the dollar to collapse.

This is not simply because of the resulting losses on China's enormous US dollar international reserve holdings.

Rather, it is because any substantial weakening in the US dollar would be associated with a corresponding strengthening in the Chinese renmimbi, which would seriously undermine China's export-led economic growth strategy.

Desmond Lachman is a resident fellow at AEI.

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