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Last Updated: Monday, 27 December 2004, 07:09 GMT
2004: Business year in review
By Martin Webber
BBC World Business Report editor

President George W Bush and his family celebrate his re-election
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.

Fading currency

However, as economic concerns took a backseat inside America, outside the country it was a different story.

One dollar bill
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 the pound.

Not surprisingly, tourists around the globe are now regularly being asked for payment in euros rather than dollars.

Dollar diversification

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.

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
Stephen Roche, Morgan Stanley chief economist

He sees further falls ahead, partly as the result of central banks around the world reducing the size of their dollar reserves.

"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 inevitable.

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.

Deeper debt

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.

Chinese imports

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.

Chinese workers
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 exchange rate.

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."


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Listen to World Business Report's Year in Review
"China continued the most rapid industrialisation in history."



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