The dollar’s recent rebound against other currencies has major connotations that go beyond the currency markets. For six years, the dollar was losing its value in terms of the euro, the yen, the British pound, and other major currencies. The apparently secular decline called into question the status of the dollar as the world’s reserve currency. The advent of the euro in 1999 and its growing stature since then suggested that at long last a real alternative to t he dollar had arrived. The dollar-euro exchange rate, the world’s most widely watched quotation, tilted heavily in favour of the latter. Yet despite the collective strength of the euro zone economies, the euro has not been able to replace the dollar as the world’s number one currency. A large part of the global trade such as, for instance, India’s imports and exports is invoiced in dollars. The world’s petroleum trade continues to be denominated in dollar despite vocal support for the euro. Central banks of the world have been parking their reserves substantially in dollar assets, although the proportion has been coming down slowly. In India, the dollar is currently worth Rs. 46.86.
The sudden upturn in the dollar’s fortunes in exchange markets since August is attributed to a number of factors but, whatever be the reasons, they allay fears of the American currency losing its pre-eminence at any time soon. Over the short-term, it is seen as a correction after a long period of decline. More relevant especially to an analysis of medium-term trends are the relative fundamentals of the U.S. economy and those of other developed countries. The U.S. economy has been battered by the housing and credit market crises and high oil and commodity prices. It is also beset with the unsustainably large twin budgetary and current account deficits, which are the major causes of the global imbalances. However, while the outlook in these areas continues to be bleak, the U.S. economy has fared better in recent times than those of Japan, the U.K., and the euro zone countries. It is clear that the pain arising out of the problems in the U.S. economy and its financial sector is felt equally, if not in a greater measure, in other parts of the developed world. Even the collapse of Lehman Brothers and Merrill Lynch last weekend has not halted the dollar’s march as it was well supported by funds fleeing riskier markets. Earlier, the unprecedented, virtual takeover of the two giant mortgage finance institutions, Fannie Mae and Freddie Mac, has in the first instance boosted the financial markets around the world. Irrespective of the U.S. policy decisions, the dollar has remained strong as a currency of refuge in troubled times.
6 months ago