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Still reigns despite the fall

The US dollar’s persistent weakness in relation to other major currencies has been in the spotlight recently. At a recent meeting in Washington of finance ministers and central bank governors of G7 countries , there was a consensus that the dollar will remain weak for some more time. Recent reports suggest that the United States’ economy is slowing down while the economies of its major trading partners, the EU and China, continue to be strong. There is a distinct possibility that the U.S. Federal Reserve will soon cut its interest rates further. Already, the Euro has been scaling new highs against the dollar, touching $1.4293 on October 19. The yen and the British pound have also strengthened in terms of the dollar. The predicament of the Euro zone countries is something very familiar in India. A stronger rupee has already impacted adversely on merchandise exports and, as the second quarter results of IT companies show, continues to dampen their profitability. An abundance of dollars brought into the stock markets by overseas investors, rather than the growth or interest rate differentials between India and the U.S., explains the rupee’s phenomenal appreciation recently. Whatever the reasons, it is unlikely that the dollar will regain its strength any time soon.

Yet for all its weaknesses, a report from the rating agency, Standard & Poor’s points out that the US dollar remains the most accepted currency, despite the growing stature of the Euro. In foreign exchange markets the dollar has a commanding position and is still the preferred unit of account for cross-border transactions. A very large chunk of global trade including transactions that neither originate from nor land in the U.S. is invoiced in dollars. Almost 86 per cent of India’s global trade during 2005-06 was in dollars. Imports and exports of petroleum are always dollar-denominated. Finally most central banks including the Reserve Bank of India continue to invest a bulk of their foreign exchange reserves in dollars. All these might seem surprising at a time the U.S. economy is beset with a major credit crisis. As Standard & Poor’s report points out, the dollar’s depreciation versus the Euro — almost 20 per cent since November 2005 — has drawn much attention but from a long-term perspective as well as in real terms, the dollar has been as stable as the other major currencies.

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