The Hindu : The year of the declining dollar

Online edition of India's National Newspaper
Wednesday, Dec 31, 2003

Opinion

Opinion - Editorials

The year of the declining dollar

FOR THE CALENDAR year 2003, the big news in the foreign exchange markets, in many ways for the global economy, has been the steady decline in the value of the American dollar. It is true that the dollar, like any other currency, has moved up and down relative to other major currencies ever since the forex markets rather than individual monetary authorities have come to decide a currency's external value. What has been special this time, however, is that the dollar's fall has been sustained through the year, touching low levels not seen for many years. In real terms the dollar has fallen by 14 per cent over 2003. On a year-on-year basis it has lost more than 18 per cent against the euro and over 10 per cent against both the yen and the British pound. The rupee has gained 5.3 per cent during this year. That indicates that the rupee while appreciating in dollar terms has actually lost against the other major currencies. The dollar's decline has spawned a number of interrelated debates. The conventional argument has been that despite its burgeoning current account deficit, the American economy will grow at a faster rate than the economies of the euro zone and Japan and that will help the dollar win back its prominence. However, despite the stronger performance by the economy of the United States, the dollar shows no signs of bouncing back.

Are there more enduring messages from the dollar's fall? One has to look well beyond the short-term and the immediate concerns of the U.S. The American dollar has been the world's reserve currency since 1971; this followed the abandonment of the gold backup for the dollar, which had been fashioned at the Bretton Woods conference. Since then the U.S. dollar has been the currency of choice for much of global trade and commerce as well as transactions among individuals; even countries at serious odds with the U.S. Government have preferred it. In dealing rooms of banks across the world, the dollar has been the denominator against which all other currencies are measured. Any whittling down of such pre-eminence will have a significance going way beyond the impact on perceptions of the world's currencies. It may alter the ways global business will be carried out in the future.

In India, there has been a wide-ranging discussion of ways to minimise risks arising out of the transformation in the outlook on major currencies. Indian exporters, for long preoccupied with the threat of an appreciating rupee, which made dollar-denominated exports uncompetitive, are being advised to look at several options to minimise those risks. While the good old way is to hedge in the forex markets, newer approaches look at invoicing in currencies such as the euro and the pound. Even in the past the rulebook allowed those options but in practice much of India's trade, import as well as export, was denominated overwhelmingly in dollars, irrespective of the destination of the trade. Even a very recent ballpark estimate places dollar denominated transactions at 60 per cent of India's external trade. Apart from the euro and the pound, Indian exporters have been advised to invoice in rupees. That advice has much merit. Exporters can thus side-step currency volatility. More accurate costing becomes feasible. On the flip side, there is no forward market in rupees. In general, overseas buyers need to be persuaded to deal in rupees. The dollar's decline may or may not be permanent but for much of world trade the time has come to look hard at other options and currencies.

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