Weakening of Dollar: Has the King lost its crown?
The United States of America (USA) has been the biggest controller of the global economyand is the big brother even today and would perhaps be in the near future also. Whatdifferentiates the past and the present is the emergence of the other rapidly growingeconomies, like China, Japan, Russia and India, which pose a considerable challenge to theUS. The US has been the market leader for ages and hence, it would be inaccurate to say thatthe King has lost its crown just because the dollar has started weakening. It is just that the USnow faces competition which perhaps was missing all this while. It is like realizing theimportance of something you have, when you are just about to lose it.The US dollar has dictated the global market and has been the deciding factor in the relativerise and decline of the other currencies. Even today, when the US and the entire world are hit by the economic recession, US being one of the worst hit nations, we still compare thestrength of our currencies with the US dollar. This clearly indicates that the ‘King’ is stillgoing strong, just that; there are ‘heirs’ in preparation. This is an alarming situation for theKing but an opportunity for all others to make the best of this time period.As in economics and physics, which mention that equilibrium is not a permanent state andthere co-exist the highs and lows, so is the case here. What is at the peak cannot remain therefor eternity unless you have perfect control over all the external variables. Being a leader isone thing and being an absolute controller is another.We can understand the position of the US dollar in a different way, if we establish the relativestate of the other currencies with respect to the US dollar. Let’s consider the Euro vis-à-visthe USD as an example. As per industry experts, rectangular pattern breakout happened in theEUR vs. USD at 1.43 levels and this is the critical breakout for US dollar which will lead tolong term depreciation against Euro. The US GDP published in the last week of July 2009,showed that the GDP contracted by 1% for Q2 2009; indicating that the recession is over andQ3 will be stabilization coupled with marginal recovery of US economy. Based upon thisupside breakout, US dollar will depreciate gradually to 1.64 against Euro for the long term; itis likely to breach the resistance levels as it is not strong enough.As global economic recovery, the attractiveness of the US dollar is diminishing and theinvestors are seeking the alternative investment like equities and commodities which wouldyield higher returns than the US dollar. This will result in diversification of the investmentfrom US dollar to equity and commodity market. As the depreciation of US dollar isanticipated, the cash inflow (i.e. receipts, receivables, etc) of companies should be in terms of Euro and cash outflow (i.e. payments, payables etc) must be in term of US dollar in order tosafe guard their profit margin and also to maintain earnings.Another report, by thePacific Investment Management Co.mentioned that, the dollar willweaken as the U.S. pumps “massive” amounts of money into the economy. The dollar willdrop the most against emerging-market counterparts. The greenback is losing its status as theworld’s reserve currency. One of the portfolio managers of the company said, “The massiveamounts of U.S. dollar liquidity produced in response to the crisis” have helped reducedemand for the currency.
,which tracks the greenback against a basket of currencies, touched 78.823 on Aug 19, 2009, the lowest that week. It has fallen 12 percentfrom this year’s high in March as U.S. authorities pledged $12.8 trillion to combat therecession. China, the world’s largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to storereserves.
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