The Hindu Business Line : Darkest hour before dawn?

Start with the US Fed Chairman, Mr Ben Bernanke’s address to Harvard University, in which he, for the first time, expressed concern about the continued fall of the dollar. One of the Fed’s mandates is to control inflation (the other is promoting employment) and the dollar’s depreciation (it recently hit an all-time low against the euro) has complicated matters enormously. Every time the dollar drops, it is accompanied by a spurt in commodity prices, which are dollar-indexed, pushing up (or at least risking) inflation and playing spoilsport to the Fed’s interest rate cutting to spur the economy.

Markets believed the US was indifferent to the dollar. After all, the greenback’s fall is good for US exports and the trade balance (which actually have improved). That seems to have changed. The reaction to Bernanke’s statement was immediate. The euro fell 300 pips. With Europe too worried about the euro’s exchange rate, the message is loud and clear. Joint and coordinated intervention is on the cards to support the dollar, if it comes to that.

Huge implications

The end of the dollar’s decline has huge implications. For one, it could halt the surge in oil prices attributable to the weak dollar. Inflation pressures and fears should subside the world over, allowing central banks to more actively pursue a growth agenda. Gold prices, driven lately almost entirely by the dollar’s fluctuations, should fall, reducing its attraction as a safe haven.

Other good news comes from falling sales of gas-guzzling vehicles in the US amidst record gasoline prices. A major shift to fuel-efficient personal transportation is in progress. The use of mass transit is rising sharply. Perceiving the new trend, Ford and General Motors are radically changing their product-mix to smaller vehicles. The latter, for example, is shutting several truck factories and putting up its Hummer (the ultimate in SUVs) brand for sale.

Recovery signs

If all these factors – a dollar recovery backstopped by central banks, falling energy and commodity prices, less energy and commodity-intensive life styles ensuring energy and commodity price dividends are not temporary – coalesce, we have the makings of a sustained global economic and market recovery. The housing and credit crises will become a bad memory.

So far there has been just a whiff of the good things to come.

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