Word: dollarization
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Spend some time in the hotels, restaurants and even newsstands of Western Europe these days, and as an American you understand pretty quickly that you're poorer than you once were. To be precise, you're 40% poorer--to go by the dollar-euro exchange rate--than you were six years...
...puzzle is that there's no real evidence that the economic prospects of Western Europe have suddenly improved 40% compared with the U.S. This makes it tempting to assign the dollar's drop to the customary moodiness of currency markets, in which traders make guesses about the future and inevitably get things wrong for years...
There may be something more significant afoot this time, though. It has little to do with the economies of Europe (or of Canada, Australia or New Zealand, whose dollars have made big gains against the U.S. version). Instead, the real action involves the countries whose currencies haven't gained on the dollar despite dramatically improved economic prospects relative to those...
China is the most obvious example. But there's also Saudi Arabia and its Persian Gulf neighbors, overflowing again with oil wealth. Even Japan, while not exactly booming, has seen its currency remain curiously weak during the dollar's long fall...
...haven't these countries' currencies been gaining on the dollar? Because their governments won't let them. China's dollar peg, established in the mid-1990s, is often portrayed in the U.S. as a mercantilist attempt to sell more stuff here (if the Chinese yuan is cheap relative to the dollar, imports from China are cheaper too). But there's much more to it than that: by reining in the often pointless fluctuations of currency markets, countries can bring stability and encourage trade...