Brand Dollar gets the jitters

Last week's shocking downgrade of the US credit rating from the top grade of AAA to AA+, one notch lower, by Standard and Poor's has immediate implications for an iconic global brand, the US dollar. We do not normally think of currencies as brands, but pause and reflect for a moment on great brands in the economic and financial sphere. There is no doubt that the US dollar leads the list. It is a household name across the world, and has commanded the trust of several generations in virtually every country. Its famous symbol, the “$”, is just about everywhere. Few brands enjoy such universal recall and recognition.

Like many iconic brands, the US dollar has been the stuff of popular legend. All of us know that the comic character Richie Rich has dollars in his eyes. In Donald Duck stories, the miserly Uncle Scrooge has a huge stockpile of dollars, and is accompanied by dollar signs wherever he goes. Hollywood has produced several movies themed around the US dollar: Million Dollar Baby , For a Few Dollars More and A Fistful of Dollars come to mind immediately. Closer home, when we speak of young IT engineers and their fabled ESOPs (Employee Stock Option Plans), we refer to them as “dollar millionaires”. Dollars are part of our everyday lexicon.

Suddenly, this great financial brand is under pressure. For the first time since 1917, US debt has been downgraded by a leading ratings agency. What were the core propositions around which Brand Dollar was built, and what really is happening now?

Reassurance and Safety

The first core proposition around which Brand US Dollar was built was “reassurance and safety”. The US Government was considered a risk-free borrower, which explains its earlier ‘AAA' status; and, therefore, the currency issued by it was considered absolutely safe. Hence, individuals and nations felt very reassured while investing in dollar assets, including cash and bonds. This halo of safety also led to the US dollar becoming the default reserve currency of the world. Now, with the downgrade of US debt to AA+ for the first time in seven decades, this fundamental proposition has come under severe attack. The new rating AA+ does not indicate the highest level of safety, and the downgrade in itself signals that the US Government, which backs the dollar, presents a higher level of risk. Clearly, the US dollar is no longer seen as the safest asset.

Financial markets and institutions are already speaking about other currencies, such as the Swiss franc, as being safer than the dollar. They are also highlighting the greater safety of other physical assets, particularly gold. The dollar will only regain its core proposition of reassurance and safety if the US economy demonstrates a sustained ability to manage its finances, and thereby regains the confidence of investors worldwide.

Dominance

The sheer size of the US economy made its currency, the dollar, the most dominant currency in the world. For over a century, no other nation or economy came even close to the magnitude and power of the US. The US also enjoyed a pre-eminent position in global trade. Therefore, the dollar naturally became the currency of choice for global transactions. Hence, the second proposition around which the great Dollar brand was built was its unchallenged dominance of finance and trade.

In recent years, this proposition of undisputed dominance has come under challenge from two fronts. First, most European nations have come together in a single currency zone, and the euro (despite its current Greek problems) has often been seen as an equal to the dollar. Second, the Chinese economy has been growing by leaps and bounds, and if it continues with such rapid growth, it is poised to overtake the US as the largest economy in the world. This will make the Chinese currency, the renminbi (yuan), yet another challenger to the dominance of the US dollar. In fact, economists have been speaking for sometime now about the possibility of the Chinese yuan emerging as the currency of choice for global transactions, provided the Chinese financial system were to become much more transparent.

Stability

Great brands need to reflect stability, and so did the US dollar, for many, many years. The US Government, which issues and guarantees the US dollar, was always seen as one of the most stable establishments. This perception was rightly based on several centuries of established democratic tradition, seamless transitions from one administration to the next, the strongest armed forces on this planet, and an abiding and predictable focus on sound management of the economy. Governors of the US Federal Reserve, such as the venerable Alan Greenspan, were seen as unshakeable pillars of wisdom and maturity, who could do no economic wrong, and were immune to political pressure.

Suddenly, a possible double-dip recession, but more importantly a very inadequate policy response by the US Government to this economic crisis, appears to have made holes in this perception of stability. President Obama's recent debt deal in the US Congress, reached at the eleventh hour, appears to have been driven primarily by political compromise, not by well reasoned or ruthless economic judgement. Indeed, for several days during this political wrangling, it seemed that the US economy would nearly shut down, which is the antithesis of stability.David Beers, head of sovereign ratings at Standard and Poor's, has been quoted as saying, defending the rating downgrade: “From the standpoint of fiscal policy, the process has weakened and become less predictable than it was.” The rating report also goes on to say: “US policy-making has become less stable, less effective and less predictable than what we previously believed.”

Therefore, yet another core proposition of brand Dollar — stability — has come under attack. If the brand has to recover on this front, the US administration will need to show that its economic policymaking has returned to being predictable and firm, and not dependent on political compromises.

So will the world's greatest financial brand recover all its sheen? After all, we have seen that other iconic brands — such as Toyota, IBM, Apple and Coca-Cola — have been through worse, and have emerged as resilient winners. But these famous trademarks have recovered on the back of excellent brand management: regaining consumer trust, pushing the envelope on product innovation, and building waves of consumer aspiration. In a similar fashion, the US dollar can, indeed, retain its iconic status and regain its sheen if it focuses on rebuilding its core propositions: reassurance and safety, dominance and stability. It will, however, have to do this in a global economic landscape which has been transformed by the rise of other great nations.

If, however, this does not happen, and if the US does not regain its famed ‘AAA' rating soon, we may perhaps be faced with a strange world we have never experienced before: Chinese yuans in Richie Rich's eyes and mansions, and Uncle Scrooge rapidly converting his stockpiles of wealth into Swiss francs and solid blocks of gold.

(Harish Bhat is Chief Operating Officer – Watches, Titan Industries Ltd. These are his personal views.)

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