Greetings,
I will be astonished if somebody has not heard about Sub Prime issue in US. But is it really the bad mortgage/loans that people need to worry about? I think there's more to it and it could get even worse. The credit crunch, the weakening economy, dollar slide in addition to the sub prime woes add more to the belief that US might be ready for recession. Some people are not ready to buy-in the recession compleletly but nobody is denying the possibility either.
Fed has resorted to the rate cuts to save the markets and infuse more liquidity into the market but if the dollar slide continues, Fed may even be forced to instead increase the rates even when recession lingers around the corner. Fed needs to balance the both.
YTD, Dollar as a currency has fallen significantly. Exporters to US, who did have contracts in USD have taken the major hits. The impact can be very painfully seen in the stock prices of Indian IT companies and other exporters as Indian Rupee has appreciated almost 15% against the dollar in this year. Airbus has already called Dollar's slide as *life-threatening*.
The decline in Dollar is led not only by economic weakness in US but there's more to it. The biggest problem with Dollar is that it has been the hegemonic currency for nearly 50 years; it sort of replaced Gold to become the common money for trade across the globe. It's not that dollar would lose it's place and countries would resort to some other currency as world's reserve currency. There are costs associated with it and is very difficult to choose any ONE currency; which could promise to give similar solidarity for decades as Dollar did. However, Euro and China's Yuan seems to be next best contenders. But let's see what could be leading to this threatening decline...
a. Dollar seemed to have gained the reputation of being stable currency for past many decades. Also, there was greater confidence of being well-regulated and transparent market in US. With that conviction gone now, net capital inflows to America seemed to have washed away.
b. Dollar is also effected by the consumer's sense of crisis leading to the all-time high speculative selling of dollars. This is one of the recent comments by Morgan Stanley's economist.
c. Central banks for many countries have kept their foreign-exchange reserves in the dollars. China alone seemed to have close to $1.4 trillion in reserves followed by Japan with $1 trillion. Imagine what can happen to dollar if all these countries think about cutting their losses and dump their dollar reserves.
d. Many countries, more importantly Gulf countries had been asked to peg their currencies by virtue of buying dollars. This would not let the Gulf currencies appreciate and US would still been able to buy the OIL in almost same price for years. But now, with dollar weakening, Gulf countries are finding it hard to curb their inflation and they would also like to change their exchange-rates; especially those countries whose currency is pegged against a basket rather than dollar alone.
So, there's more to dollar-decline than mere currency depreciation. I think American policy makers are smart enough not to let the dollar crash. I also think that other countries would also do their jobs to help the American's policy makers.
Outcry remains same...SAVE the Dollar!!
~ Navjot Singh Sohanpal
I will be astonished if somebody has not heard about Sub Prime issue in US. But is it really the bad mortgage/loans that people need to worry about? I think there's more to it and it could get even worse. The credit crunch, the weakening economy, dollar slide in addition to the sub prime woes add more to the belief that US might be ready for recession. Some people are not ready to buy-in the recession compleletly but nobody is denying the possibility either.
Fed has resorted to the rate cuts to save the markets and infuse more liquidity into the market but if the dollar slide continues, Fed may even be forced to instead increase the rates even when recession lingers around the corner. Fed needs to balance the both.
YTD, Dollar as a currency has fallen significantly. Exporters to US, who did have contracts in USD have taken the major hits. The impact can be very painfully seen in the stock prices of Indian IT companies and other exporters as Indian Rupee has appreciated almost 15% against the dollar in this year. Airbus has already called Dollar's slide as *life-threatening*.
The decline in Dollar is led not only by economic weakness in US but there's more to it. The biggest problem with Dollar is that it has been the hegemonic currency for nearly 50 years; it sort of replaced Gold to become the common money for trade across the globe. It's not that dollar would lose it's place and countries would resort to some other currency as world's reserve currency. There are costs associated with it and is very difficult to choose any ONE currency; which could promise to give similar solidarity for decades as Dollar did. However, Euro and China's Yuan seems to be next best contenders. But let's see what could be leading to this threatening decline...
a. Dollar seemed to have gained the reputation of being stable currency for past many decades. Also, there was greater confidence of being well-regulated and transparent market in US. With that conviction gone now, net capital inflows to America seemed to have washed away.
b. Dollar is also effected by the consumer's sense of crisis leading to the all-time high speculative selling of dollars. This is one of the recent comments by Morgan Stanley's economist.
c. Central banks for many countries have kept their foreign-exchange reserves in the dollars. China alone seemed to have close to $1.4 trillion in reserves followed by Japan with $1 trillion. Imagine what can happen to dollar if all these countries think about cutting their losses and dump their dollar reserves.
d. Many countries, more importantly Gulf countries had been asked to peg their currencies by virtue of buying dollars. This would not let the Gulf currencies appreciate and US would still been able to buy the OIL in almost same price for years. But now, with dollar weakening, Gulf countries are finding it hard to curb their inflation and they would also like to change their exchange-rates; especially those countries whose currency is pegged against a basket rather than dollar alone.
So, there's more to dollar-decline than mere currency depreciation. I think American policy makers are smart enough not to let the dollar crash. I also think that other countries would also do their jobs to help the American's policy makers.
Outcry remains same...SAVE the Dollar!!
~ Navjot Singh Sohanpal
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