Dollar's dip sends investors on a hunt

The recent slump in the value of the U.S. dollar means investors are searching the world for higher returns instead of flocking to dollar-denominated and U.S.-taxpayer-backed bonds as a haven in a time of crisis.

Since peaking this year at 0.7974 euros to the dollar March 5, the value of the dollar has fallen 14 percent to 0.6826 euros to the dollar yesterday. Relative to a basket of currencies tracked by the Federal Reserve - including the relatively weak Japanese yen and British pound, the dollar has fallen about 10 percent since early March.

On the most superficial level, the decline in the value of the dollar makes it more expensive for Americans in Europe. A liter of beer at Munich's Oktoberfest, for example, that would have cost an American reveler $10.63 at March's exchange rate, now costs $12.50.

On the plus side, the weak dollar helps U.S. exporters because it makes their goods cheaper overseas relative to goods produced by French and German competitors.

But the bigger issue for the United States is the possibility that the dollar could lose its status as the world's primary reserve currency. It holds that position because it is seen as a strong store of value, allowing the U.S. government to pay relatively low interest rates on debt.

Losing that status would mean the federal government would no longer be able to go on a borrowing spree, as it has done to support the economy over the last year - at least not without paying significantly higher interest rates.

The United States is far from what some economists see as the worst-case scenario, but countries with weak currencies have to sell bonds denominated in another country's currency to finance their governments. That is extremely costly and can lead to all sorts of economic chaos, including painful currency devaluations.

The U.S. dollar remains key to the global economy, but this month the International Monetary Fund and China took steps toward reducing the dollar's dominance as the world's reserve currency. China, which is the biggest foreign buyer of U.S. Treasuries, agreed to invest the equivalent of $50 billion worth of IMF bonds denominated in a quasi-currency, based on a basket of currencies.

The move, by itself, was just a small blow to the U.S. dollar's status as the main currency foreign governments want to hold in their treasuries, but it could be the start of a major shift in the global economy.