In late June, with no local currency in my pocket and a case of jet lag that only a doppio espresso could cure, I stumbled into a familiar London storefront. I whipped out my Starbucks card, which still had about $8 left on it. But when the barista rang up my coffee and newspaper, his smile crinkled into a frown. "I'm afraid you're all out," he said. "That'll be another 40 pence. Cheers!" I had just been punked by the weak dollar.
In 1971, Treasury Secretary John Connally told foreign counterparts that the dollar is "our currency, but your problem." Well, 2007 may have been the year the slumping dollar became our problem, too. Thanks to several macroeconomic factors—a slowing economy, the Federal Reserve's accommodative interest-rate policy and a lack of confidence in the U.S. financial system due to the subprime debacle—2007 was a bad year for the greenback. The dollar last summer hit a 27-year low against the British pound and a 31-year nadir against the Canadian dollar. The trade-weighted dollar index—a measure of strength against six major currencies—was off 38 percent from its 2002 peak.
The long-term decline threatens the dollar's status as the world's reserve currency, which it has enjoyed since World War II. The dollar is the currency in which German department stores pay Vietnamese garment factories, Indian distributors purchase Saudi Arabian oil and black marketers around the world conduct business. All those dollars floating around the world not spent here are essentially free loans to the United States from foreigners—and they help keep U.S. interest rates low.
But nobody likes to hold on to declining assets. So it's no surprise that passengers in 2007 began to bail from the listing USS Greenback. The rumor that Brazilian supermodel Gisele B?ndchen no longer wanted to be paid in dollars turned out to be false. But in May, Kuwait untethered its currency from the dollar and moored it to a basket of more buoyant currencies. In November, India said tourists could no longer pay admission fees at 120 tourist sites (including the Taj Mahal) in dollars. Russia, China and Japan have been quietly rebalancing their foreign-currency holdings.
"We have a strong dollar policy," President Bush said in November. But the strong dollar policy consists of little more than saying just that. Currency strategists say that because the items that weighed on the dollar in 2007—fiscal imbalances, a slowing economy, credit issues—aren't likely to turn around any time soon, they don't expect a sharp reversal in the dollar's fortunes. So if you can't get through the day—at home or abroad—without a pit stop at Starbucks, load those cards with everything you've got. Cheers!