Wither The Dollar

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Fear of that outcome probably is overblown. Foreign officials understand that the effects of dumping dollars would circle back and cripple their economies. In an interview with TIME, Masatsugu Asakawa, a top Japan Ministry of Finance official, said flatly there will be no dollar dumping. "Our foreign-reserve planning is in terms of 100 years," he said. Holding dollars, "sometimes we enjoy profit. Sometimes we suffer loss. So what?" The point is, it gives Japan flexibility. "Who knows when we might have to intervene to support the yen" after years of supporting the dollar? he asks.

Still, few U.S. economists feel comfortable that the fate of the economy sits largely in the hands of its creditors, especially when all parties are playing an international blame game. Europeans want the U.S. to cut the deficit; the U.S. wants Europe to stop whining and stimulate its economy, which would generate domestic demand and offset business lost to the U.S. and China because the weak dollar has made European goods so much more expensive. Both European and U.S. officials want China to revalue its yuan. With a hot economy and trade surplus, the Chinese, many Westerners believe, can handle a stronger currency, and there are signs that they will go along. The cheap yuan has begun to translate into higher inflation in China. A stronger currency would relieve some of that pressure. And two weeks ago, officials from the Chinese central bank met in the city of Guilin and asked "a lot of questions about what would happen if they ended the dollar peg and instead pegged the yuan to a basket of currencies," says a foreign banker who attended. "I hadn't heard those questions before."

That's a good sign. In this delicate balance, if the Japanese hold their dollars, if the Chinese let the yuan rise even a little and suggest they are willing to go further, if Europe does something to jump-start demand at home, and if the U.S. addresses its budget shortfall — well, we may just escape this jam without a scratch. That's a lot of ifs. But, thankfully, everyone has something at stake.