Warning:

When a seemingly innocuous remark from the central bank of South Korea makes the dollar tank, as happened on Tuesday, all is not well with the US position in the world economy.

The dollar has been sliding for three years, thanks in part to the Bush administration’s decision to try to use a cheap dollar to shrink the nation’s enormous trade deficit.

On Monday, South Korean central bank reported that it intended to diversify into other currencies and away from dollar-based assets. And why not? It holds about $69 billion in US Treasury securities, or 4 per cent of the total foreign Treasury holdings. Such dollar-based investments lose value as the dollar weakens, leading to losses. But as the Korean comment ping-ponged around the world, all hell broke loose, with currency traders selling dollars for fear that the central banks of Japan and China, which hold 46 percent of foreign Treasury holdings might follow suit. That would be the United States’ worst economic nightmare.

That decision did not precipitate a meltdown. But it sure gave a taste of one. The dollar suffered its worst single-day decline in two months against the yen and the euro. That episode has its roots in US structural imbalances that will be corrected only by new policies. If Bush were half the capitalist he claims he is, he would listen to what the markets are saying. — The New York Times