ANALYSIS - Dollar losing its luster but still reigns globally

By Todd Benson and Elzio Barreto

SAO PAULO (Reuters) - Until a few years ago, most Brazilians able to hoard cash would rush to buy U.S. dollars to prevent runaway inflation or another economic meltdown from wiping out their hard-earned savings.

These days, with the greenback getting trounced around the globe and the Brazilian real soaring, the once almighty dollar is losing its luster in Latin America's largest country.

Instead of stashing dollars under their mattresses, many Brazilians now set aside money to buy euros or invest their savings locally, a sign of the country's newfound confidence in its economic future.

"People here just don't view the dollar as the safe haven it once was," said Joao Medeiros, a partner at Pioneer Corretora in Sao Paulo, Brazil's largest currency brokerage.

While the dollar still reigns supreme in global commerce, its precipitous decline is tarnishing its allure as an investment or as a safety net among the burgeoning moneyed classes in emerging economies like Brazil and Russia.

But in many places, especially those where black markets in currencies are an integral part of the economy, the greenback is still king.

The dollar has dropped about 16 percent against a basket of currencies since early March, dragged down by worries about the ballooning U.S. deficit. The recovering world economy has also helped push the dollar lower by rekindling appetite for riskier investments such as stocks and corporate bonds.

The greenback's slide is causing headaches for policymakers around the globe, particularly in countries with floating exchange rates, and may be discussed at this weekend's Group of 20 meeting of finance officials in Scotland.

Brazil, which last month began taxing foreign capital inflows in a bid to halt the real's surge, wants the G20 to take action to staunch the flow of money into emerging markets as yield-hungry investors shed dollar assets.

Professional investors aren't the only ones dumping the dollar. In Russia, where the dollar was the benchmark after the collapse of the Soviet Union in the 1990s, residents are increasingly turning to the euro .

"I need euros because this is the currency with which I travel to Europe," said Taissia, a 57-year-old architect in Moscow who declined to give her surname. "I never go to America on holiday, but I still have dollars to balance my savings."

Polls show that the euro has overtaken the dollar as the preferred foreign currency for savings in Russia, though most residents now prefer to keep roubles or invest in real estate.

"People can't get an adequate rate of returns by investing in dollars. So that's why they tend to leave more of their money in their home countries," said Edmund Phelps, a Nobel Prize winning economist from Columbia University in New York.

WOUNDED, BUT STILL KING

In many places around the world, however, the dollar retains its status. On the streets of Hanoi, Vietnamese looking to save for the future invariably swap dong for dollars or gold, the world's two most traditional safe havens.

In China, where the government manages the exchange rate, the yuan is the only currency most people come across. But when the Chinese do seek out a foreign currency, they go after the dollar, betting that Washington's superpower status will guarantee the greenback's long-term strength.

"I can live with the dollar at these levels," said Xu Jingchang, a businessman in the southern export hub of Guangzhou. "The dollar might very well go up in the future, so I'll just wait and see. The economy will recover in the United States sooner or later."

In some Latin American countries, the dollar remains an insurance policy of sorts against inflation or a possible devaluation of the local currency -- two perennial threats that have dogged the region for decades.

Battered by successive economic crises, Ecuador scrapped the sucre in 2000 and adopted the dollar as its official currency, a move that left-wing President Rafael Correa recently said would be too painful to undo.

In Venezuela, residents and companies alike flock to money changers to stock up on dollars to seek protection against rising prices and a devaluation of the bolivar, which is trading on the black market at more than twice the official exchange rate of 2.15 to the greenback.

Argentines, stung by the traumatic collapse of their economy in 2002, distrust the peso and often change their savings into dollars and stash them offshore or in dollar-denominated bank accounts locally.

"I'm saving to buy an apartment because here prices are set in dollars and it's going to be like that for a long time," said Soledad Orozco, a 35-year-old telecommunications manager in Buenos Aires who holds her savings in greenbacks.

In Mexico, on the United States' doorstep, the thirst for dollars is even more pronounced. After all, the two countries' economies are so intertwined that the dollar is widely accepted as a parallel currency to the Mexican peso .

"If a foreigner wants to pay in dollars, we benefit," said Rene Juarez, a 25-year-old vendor whose family runs a garment shop in Mexico City's famed marketplace, the Ciudadela.

"Some we use to cover expenses. But the rest we save in a mattress to take out whenever there is trouble."

(Additional reporting by Toni Vorobyova and Dmitry Zhdannikov in Moscow, John Ruwitch in Hanoi, Sally Huang in Beijing, Andrew Cawthorne in Caracas, Karina Grazina in Buenos Aires and Patrick Rucker in Mexico City; Editing by Kieran Murray)

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