The Hindu Business Line : Dollar rise

Economists have in the past been concerned about the dollar's appreciation versus a host of currencies. The reason for huge appreciation of dollar was the excessive demand for it by several countries that maintain dollars in reserves.

Now, with dollar depreciating, the value of such reserves is going to be valued lower and there is serious thought among such countries as Japan and China on the utility of holding excess dollar reserves.

The concern in economic circles is if there is a run on the dollar, who would gain due to the depreciation of the greenback. Obviously, the central banks that hold large reserves would be major losers. The countries exporting to the US would have to reduce costs to increase their exports to US, volumes of which may also suffer. Also, the competitive advantage of US industry may increase and its trade deficit will improve.

How did the dollar appreciate so much? The reason lies in fact that rest of the world has been financing the consumerism of the US by exporting to it products at cheap rates and keeping currencies low to increase their competitiveness. The US' trade deficit has been growing for quite some time now and it was unnatural for dollar to have remained at abnormal levels.

China is the biggest contributor to this. By keeping the yuan tightly pegged to the dollar it has depreciated its currency almost 40 per cent. The world economy has heated up due to an artificial demand for dollar created by vested interests; this bubble may burst with the dollar facing depreciation.

The trend has begun and the question now is at what value will the dollar stabilise. With sudden depreciation of dollar, the demand for it is going to decrease, which would lead to further depreciation.

How steep will be the fall of the dollar once China removes its support? Any sharp depreciation of the dollar will plunge the world economy into chaos, and the monetary institutions will not be able to help the US as they would themselves be in deep financial crisis.

The institutions based in Europe would be able to bail the US out. But will a strong US economy be in the interest of Europe? With the weakening of US economy, countries such as France, Germany and Italy will be able to dominate the world in the coming years.

Nagesh Vishnumurthi

e-mail

Letters to the editor and contributions can be sent by e-mail to: bleditor@thehindu.co.in