For quite some time now, I have not sent any piece to Business Line . After writing profusely on Dollar in Business Line in 2003, I did not articulate much subsequently on that subject too. Many a time I feel that I have said enough. The story of U.S.Dollar is obvious even to layman. Friends and students are asking me to write on ailing Dollar. Hence this revisit on Dollar’s plight. A brief recap.
The U.S.Dollar is getting beaten rather belatedly, as Japanese Yen witnesses a decisive rise in its value .Despite zero interest ruling in the U.S, recovery is yet to percolate down deep into the economy. Unemployment is on the rise. Support for further fiscal stimulus is lukewarm, as authorities begin to worry more about the consequences of rising budget deficit, on the value of Dollar.
The richest country in the world is not in good shape now. It is the largest debtor country. Fortunately, its growing external debt is denominated in its own currency, dollar. The U.S. can very well print and repay the debt. That might lead to an inflationary explosive situation. Let us hope that U.S will not resort to that kind of mis adventure.
The U.S has all the problems of any typically mismanaged developing economy. Its currency is weak .Cumulative increase in the budget deficit and escalating trade
deficit have raised debt to GDP ratio: fear of rising inflation is very much real, given the ultra low interest rate policy followed and continuing expansionary policy thrust. Any other country, having all these vulnerabilities, would have experienced a currency chaos. Because the U.S. is still a key currency country and enjoys the residual hegemonial status, dollar’s death is postponed.
It’s not that the U.S has suddenly got into this financial mess. It has been there for ages. The U.S. had been always hopping from one crisis to another, and falling into mild and shallow recessions despite getting boost to the growth rate via finanacial globolisation I the recent past. The U.S.Economy and its currency could escape from speculator’s attack as foreign central banks always came forward to defend the dollar in a crisis situation .
The dollar would soon touch its lowest level against Yen.Shall we recall that in 1987, a similar situation prevailed and the world Central Banks signed Lovoure Accord to arrest the dollar’s slide, and revive its value.
Despite all central banks best attempts, the dollar again hit the bottom in mid 90’s : since then, a great deal of diversification has been taking place away from dollar, slowly but steadily. The sub prime lending crisis of late 2000s has put the U.S economy at a cross road. It has exposed the fundamental weaknesses in the U.S banking system. Dollar was not under attack then, thanks to safe haven hypothesis and an enormous amount of dollars was flowing back towards the U.S , close on the heels of the crisis in 2007-08. but , hence forward the dollar scenario will be a different story. Progressively, dollar will decline in value, with occasional bouncing back. But the secular tendency for the dollar is to fall.
Whatever may be the support ring placed around the dollar, one thing is certain that the dollar depreciation cannot be halted. Foreigners would not suddenly withdraw financing deficits. They all know that they are under dollar trap. China has already seized up the problem and started diversifying towards non- dollar assets in a graduated fashion. Central Bank of Japan and others may not want their currencies to rise against the dollar. But they too cannot ultimately stem against the tide. In all probability, when Euro and Yen fail to rise, to punish the dollar, gold will glitter. Black gold and few other metals may give company to yellow metal. The dollar will die only slowly, as the rest of the world will not allow any quick and tragic death of Dollar.
The U.S.Dollar is getting beaten rather belatedly, as Japanese Yen witnesses a decisive rise in its value .Despite zero interest ruling in the U.S, recovery is yet to percolate down deep into the economy. Unemployment is on the rise. Support for further fiscal stimulus is lukewarm, as authorities begin to worry more about the consequences of rising budget deficit, on the value of Dollar.
The richest country in the world is not in good shape now. It is the largest debtor country. Fortunately, its growing external debt is denominated in its own currency, dollar. The U.S. can very well print and repay the debt. That might lead to an inflationary explosive situation. Let us hope that U.S will not resort to that kind of mis adventure.
The U.S has all the problems of any typically mismanaged developing economy. Its currency is weak .Cumulative increase in the budget deficit and escalating trade
deficit have raised debt to GDP ratio: fear of rising inflation is very much real, given the ultra low interest rate policy followed and continuing expansionary policy thrust. Any other country, having all these vulnerabilities, would have experienced a currency chaos. Because the U.S. is still a key currency country and enjoys the residual hegemonial status, dollar’s death is postponed.
It’s not that the U.S has suddenly got into this financial mess. It has been there for ages. The U.S. had been always hopping from one crisis to another, and falling into mild and shallow recessions despite getting boost to the growth rate via finanacial globolisation I the recent past. The U.S.Economy and its currency could escape from speculator’s attack as foreign central banks always came forward to defend the dollar in a crisis situation .
The dollar would soon touch its lowest level against Yen.Shall we recall that in 1987, a similar situation prevailed and the world Central Banks signed Lovoure Accord to arrest the dollar’s slide, and revive its value.
Despite all central banks best attempts, the dollar again hit the bottom in mid 90’s : since then, a great deal of diversification has been taking place away from dollar, slowly but steadily. The sub prime lending crisis of late 2000s has put the U.S economy at a cross road. It has exposed the fundamental weaknesses in the U.S banking system. Dollar was not under attack then, thanks to safe haven hypothesis and an enormous amount of dollars was flowing back towards the U.S , close on the heels of the crisis in 2007-08. but , hence forward the dollar scenario will be a different story. Progressively, dollar will decline in value, with occasional bouncing back. But the secular tendency for the dollar is to fall.
Whatever may be the support ring placed around the dollar, one thing is certain that the dollar depreciation cannot be halted. Foreigners would not suddenly withdraw financing deficits. They all know that they are under dollar trap. China has already seized up the problem and started diversifying towards non- dollar assets in a graduated fashion. Central Bank of Japan and others may not want their currencies to rise against the dollar. But they too cannot ultimately stem against the tide. In all probability, when Euro and Yen fail to rise, to punish the dollar, gold will glitter. Black gold and few other metals may give company to yellow metal. The dollar will die only slowly, as the rest of the world will not allow any quick and tragic death of Dollar.
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