By Martin Webber
BBC World Business Report editor
The economy took a backseat to security as the US went to the polls
For much of 2004, the world has looked on as the US dollar dropped in value against the euro and the pound.
In the first of a two-part review of the year, World Business Report asks if the greenback's days as the top global currency are numbered?
In the world's biggest economy, most attention
centred on the fiercely fought Presidential election.
The re-election of George Bush for four more years
meant no radical shift of economic priorities for
companies and markets to cope with.
But what was highly unusual about this US Presidential
race was that the economy failed to top voters'
concerns. Three years after the attacks on
the World Trade Center, it was security that
loomed largest in voters minds.
In any case, some of Americans' fears about the US
economy did ease during the past year. At the
start of 2004, the US revival had been dubbed
the "jobless recovery", but - as the year wore on -
job creation did accelerate, even if many
of the new jobs were part time.
However, as economic concerns took a backseat
inside America, outside the country it was
a different story.
Some economists are predicting the dollar will fall further
Concern about where the US economy was heading
led to a sharp fall in the value of the dollar,
heralding suggestions that the dollar is on
the way out as the global top currency.
The last century saw the demise of gold as
the world's key store of value. It was
replaced by the dollar as the asset most
central banks around the world wanted to hold.
But since April this year, the dollar
has slid by 12% against the euro
and by 10% against
Not surprisingly, tourists around the globe are now regularly being asked
for payment in euros rather than dollars.
But is this only the beginning of the
dollar's retreat? Jim O'Neill, from investment bank Goldman Sachs, is one
of the world's most respected economists.
He sees further falls ahead, partly as
the result of central banks around the
world reducing the size of their dollar
"Many people, including ourselves, have believed that ever since the euro was introduced it would simply be a matter of time until a number of large reserve holders around the world would want to diversify away from the dollar.
"The potential for significant dollar diversification from Asia and to some extent from parts of the Middle East and Russia, and maybe even parts of Latin America, is huge."
So the potential for a further rush to sell the
dollar looms large and is - in many ways - pretty
Any country that spends beyond its means usually ends up devaluing its currency, and the US continues to spend heavily on
foreign wars and tax cuts.
The US sucks in more in imports than it earns from its exports by a huge margin - a record $50bn (£25.7bn; 37.3bn euros) a month in fact. That needs to be financed by foreigners buying more and more US financial assets like bonds and shares.
Stephen Roche, who is chief economist at the bankers Morgan Stanley, in New York, told World Business Report that Americans had overspent other people's money.
"The US economy continues to grow beyond its means. It has gone deeply into debt. I do not think that this is a sustainable recipe for economic growth for the world's dominant economy.
"We have demanded and asked more of the world in the way of financing our own economic growth than any nation has done in recorded history.
"Globalisation cuts both ways and if foreign investors ever - for what ever the reason - get tired of investing in dollar denominated assets, then the US dollar cracks, interest rates shoot up sharply and our asset dependent economy goes up in smoke."
America's central bank took a cautious approach, as
it moved short-term interest rates up to more normal levels.
But more rate rises are to come in 2005, and it is
not clear how well the US economy will take it.
The dollar's decline would normally help rebalance
the trade deficit, by making US products cheaper in
world markets. But the problem is that the
dollar has not been declining against one very
important economy - China.
Rapid Chinese industrialisation shows no signs of slowing
That is because China maintains a fixed currency
rate against the dollar. So cheap Chinese imports
continued to flood into America unabated.
China is not likely to unlock its currency's value for
many years, as Chinese financial institutions aren't
developed enough to cope with a freely floating
In the meantime, China continued the most rapid
industrialisation in history, with growth slowing only slightly from
its recent rate of around 10% a year.
Freedom of information
Such free enterprise capitalism has boomed in
what is still a one-party communist society, where media remains censored by the authorities.
So how does this affect the operations of China's
largest internet search engine company, Baidu.com?
It has 60 million search queries a day, and has received
a big investment from the world's largest search engine Google.
Baidu's chief executive Robin Li told World Business Report that his
search engine was "a revolutionary tool that allowed people to gather information to change their lives".
But we asked how his searches could reveal the
truth when many sites, like newspapers in Taiwan and the
BBC's Chinese service, were blocked by the censors?
"I think this issue is at least exaggerated by the western media," he said. "As a Chinese, I lived in the US for eight years before returning to China. I don't see too much difference in terms of information access.
"We are a company located in Beijing, so we need to obey the Chinese law, so we will do whatever the law allows us to do and we will try to block anything that's deemed illegal by the Chinese law."