Counting on Dollars: Backing a Loser?
About half the FTSE 100 companies, by value, now report their accounts in US dollars, not pounds. But with the greenback losing its international status, have they chosen the wrong currency?
The problem is not whether the dollar is currently strong or weak -- though that does affect UK shareholders -- but whether it is still the world's international currency of choice. As a global common denominator, the dollar is in decline.
Its loss has been the euro's gain. Although created only a decade ago, the European single currency is now an established medium of exchange, second only to the dollar in trading volumes. Yet while UK companies as diverse as AstraZeneca, BP, Experian, HSBC and Smith & Nephew add up their accounts in dollars, British firms are reluctant to present figures in euros, even though Continental Europe is their main trading partner.
Britain is not part of the euro, of course, but neither does it use dollars. But since sterling's demise as the main international currency, the US dollar has been the common global exchange. Many corporate sales and inputs, especially commodities, are priced in dollars. Gold and oil are quoted in dollars globally (except that Iran, for political reasons, sells euro-denominated oil).
While the US economy was strong, this currency imperialism was not just tolerated but encouraged. Countries with trading surpluses such as China and the oil producers invested their reserves in dollars. But with America's economic crown slipping, the steady decline in the dollar's value means these countries constantly lose on their investments. That was how sterling lost its sheen, and while it has taken a long time, countries with surpluses are steadily realising they should invest in a currency that better holds its value.
The question is what. Daily dealing in dollars is still twice the trading in euros (which is itself double the dealing in sterling). China's renminbi or Russian roubles are mooted to take the mantle, or even a new global currency: the post-war Bretton Woods agreement created the 'bancor' for that purpose and the IMF hoped special drawing rights would be a cross-border currency, but like 'baskets of currencies', they proved unpopular. Neither investors nor companies like virtual currencies; they want a real asset, whatever its worth, and one that can be readily exchanged into other real assets.
The euro is thus still the alternative to the dollar but the European Central Bank is unwilling to accept an international role for its currency. Could it become the unofficial world currency? Used by all but with no government policy and no state underpinning? The alternative is that the dollar loses its prime position but no other single currency takes its place, leaving business with a wide range of important, but not dominant, exchange mediums.
That would be a messy outcome. Worse even than choosing to present the company accounts in dollars and paying dividends in cents when the American currency is losing its international supremacy.
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