Dollar Dilemma

  • SumoMe


The world economies are changing very rapidly and the third world countries which were referred to as developing or underdeveloped not so long ago, have started showing signs of unprecedented growth in all fields. Countries like India, China and Brazil have shown their strong hold in many fields. Be it India’s success in the Software Industry, or China’s expertise in cheap electronics, both these countries have made life much tougher for American software and electronic firms. As a result, we see our economy going strong and Indian Rupee gaining strength compared to US dollar. The US dollar is on a scary slide with gold, crude oil are hitting record highs.

International economic transitions involve exchange of some commodity for “money”. While the commodity list under the exports or imports but dollar stands uniformly for money. Problem arises because the basic unit of this monetary exchange (dollar) has no absolute value but keeps changing and is left on market forces manipulating it to define its value and this very fact gives rise to huge economic costs and unforeseen risks that make economies and stock markets all around the world go shaky at a wink of change in dollar rates.

If it was only the market forces to determine the US dollar rates, they could swing in any range from 0 to infinity and here comes the role of “Federal Reserve Bank of America”. While most of the countries counter inflation by increasing their growth rates and GDP, since higher growth rate can temporarily sustain inflation rates. However, Fed bank counters this inflation rate by its vague influence over the price of dollar and hiking rates. This excessive hiking leads to “Overshoot” of economy and as a result federal bank cuts down its rates to nullify the damage and leads to another condition called “Recession”. These two are integral part of American economy and business cycle. Recession is the phase going on right now as we see the US dollar slumping continuously. The recession affects the countries which export goods to America negatively and this is the reason the why the Indian software industry and the Indian IT giants like Wipro and TCS have slashed employees and cut down the offered salary to freshmen by as much as 10% per annum around the country.

The USA cannot go on increasing rates of dollar just for the reason that its nationals are benefited by it. High dollar rates hit American exports badly, because at higher rates of dollar, the US firms find it hard to compete in foreign markets with indigenous cheaper goods. Moreover, it even hits American tourism as it becomes costlier to tour America.

Lowering the rates of US dollar has its backlashes too. The US consumers find higher prices on foreign goods which lead to higher cost of living and given the low value of dollar, US firms find it a mountainous task to expand their business abroad. It also prevents American citizens from travelling around the world, just for the reason that it becomes little more expensive.

In the Forex market, the currencies are exchanged or bartered in terms of dollars and only those currencies that are stable are traded. Sometimes they are decided by political reasons also, and this is the reason why we don’t see Nepalese currency being traded in terms of dollar or any other currency belonging to a poor nation. This very reason hampers the growth of these countries because there foreign exchange reserves are never going to go up.

Sometimes the currency of a country is not traded just for the fact that the country produces very few goods that are of American interests and by these factors, America has been exercising its influence over almost all the global trade. Unlike the commodities or stock markets, the Forex market has no central trading floor where buyers and sellers meet. Most of the trades are completed by commercial banks and forex dealers in the U.S. and abroad using telephones and computers. Hence, it’s quite a tenet thought that American supremacy is not going to go down in near future just for the fact that it holds all the discretion to vary the pattern of trade that goes on and this is how America is still able to hold its position of being the lone superpower. The only factor that is now currently working to undermine the monopoly of the dollar is the Euro, but it’s far too early to predict anything. Euro is still a new currency and a paradigm shift will take time in deciding how the trade and Forex are governed.

Ajeet Shekhawat

[Image courtesy: http:[email protected]/2290475072/]

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