Davos: Billionaire investor George Soros said the fallout from the US subprime crisis will bring about the end of the dollar's status as the world's reserve currency.
"The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency," Soros said in a debate yesterday in Davos. "Now the rest of the world is increasingly unwilling to accumulate dollars."
Falling share
The dollar's share of global foreign-exchange reserves fell to a record low of 63.8 per cent in the third quarter as demand for US assets waned after the collapse of the US housing market, according to International Monetary Fund data. It accounted for 65 per cent three months earlier. The euro's share rose to 26.4 per cent from 25.5 per cent. IMF quarterly figures go back to 1999, the year the euro was introduced. The greenback has dropped 11 per cent against the euro and 13 per cent against the yen in the past year.
Soros made $1 billion in 1992 betting against the pound, forcing the British government to abandon a peg to a basket of European currencies. The euro has gained 55 per cent against the dollar since Bush entered the White House on January 21, 2001.
"From the 1980s we had the belief in the magic of the marketplace, and the authorities were so successful that they started to believe in this market fundamentalism," he said.
'Too far'
"That's gone too far." In times of crisis, "they suspended the rules and they bailed out the banks. That created an asymmetric incentive system, a moral hazard, that allowed the expansion of credit".
Rising defaults on US subprime mortgages sparked a rout in the credit markets in August, leading banks to cut money for consumer lending, hurting the US economy's main engine. The Fed on Tuesday lowered its benchmark rate in an emergency move for the first time since 2001 after stock markets from Hong Kong to London tumbled amid signs the world's largest economy sliding into recession.
Soros has used past appearances in Davos to predict the dollar's decline. In January 2004, he said the US currency would drop for a third year. It then fell seven per cent, according to a Federal Reserve trade-weighted index of the currency.
