Sep 1 - 7, 2008

Like "the sun never sets on British Empire" myth, the super US dollar carried with it an air of omnipotence. In early 1985, the dollar bought 3.47 Deutsche Marks / 263 Japanese Yens. US Central bankers, although not sure about the realistic exchange regime, were unanimously sure that the prevailing rates were substantially wrong. The global economy was experiencing unprecedented imbalances situation. A historically strong dollar had triggered cheap goods import euphoria and the US markets were flooded with Japanese and German goods. US current account deficit was hovering around US$ 160 billion or 3.6 per cent of GNP. Japan and Germany's surpluses had gone up to 4.3 per cent of their GNPs. The foreign borrowing incurred to finance a never-ending series of trade deficits had transformed the US from the largest post-war creditor economy to the largest debtor economy _ a status it enjoys till date.

Writes Steven Soloman in 'The Confidence Game, 'what goes up, must come down. But how fast? How hard would it land?

The laws of market capitalism guaranteed the super dollar would eventually fall back to more rational levels. The crucial questions of how far, how fast, and when it fell would be dictated primarily by global currency market forces.

Merely reversing the dollar's previous rise was insufficient to restore the world economy to healthy balance. Too many other economic relationships had been altered by it; they had to readjust. Simply taking away the original super dollar shock was the economic equivalent of trying to revive a pedestrian who had been run over by an automobile by running over him again in reverse."

In the words of Volcker, US was living on borrowed money and time. The biggest worry of the time was the collapse like situation to be followed by the imminent dollar fall; the global economies were bound to go through convulsive adjustment process that might exhaust them of the power to bounce back. To the surprise of many, the dollar fell without producing destructive economic waves. The then US Treasury Undersecretary David Mulford commented, "The October 1987 stock market crash was the fallout. Volcker was always nervous about a free fall of the dollar and rising interest rates. He was always wrong on it."


The status of the only super power in a unipolar world has had some nightmarish influence on US economy. US has been caught, more than once, indulging in extra-economic measures to boost its sagging economy. The Gulf war of nineties was one such occasion when US tried to improve upon its economic performance through military adventure. Saudi Arabia and Kuwait had to foot the bill of this war with major economic benefits accruing to the US. The fact that Iraqi nation was the major loser mattered little to the perpetrators of this econo-military hoax. The 9/11 episode occurred exactly when the newly inducted administration was airing its worries about the US economic situation.

With the ups and downs in the US as well as the global economy, the dollar still remains the commanding economic force. It is likely to remain a force till such time the oil producers opted for some drastic measures, may be the reviewing of dollar's single denomination status. Iran and Venezuela from the "evil nexus" zone are bracing for the change; Arab countries may follow suit. But all such views are conjectural in essence. The fact remains that dollar has managed to survive as a force to reckon with. The US current account deficit has been in the range of 5-6 per cent of GDP during the last three years. Its economic supremacy is being challenged by the high productivity of Japan and the emerging economies of China, India and Brazil. The immediate challenge comes from the Euro zone and the stability of Euro vis--vis dollar. The challenge, however, remains subdued in the face of certain anomalies amongst the members of 15-nation combine. The missing homogeneity element and the inter-nation policy differences have been the Euro's Achilles' heel. So long as the dollar denomination of oil remains in vogue, the oil remains at the top of the trading items' list, the nations continue to maintain their reserves in dollars and US continues to enjoy the status of the only super power, there is little chance that yester years' super dollar will be diminished in the economic memories of the contemporary world.


This week's reports from The Wall Street Journal give a view of the resilience dollar has been showing against leading international currencies, Euro, Pound and Japanese Yen.

On Monday (25 August 2008) Euro changed hands at $1.4752, down from $1.4788 on Friday last week. The currency strategists at Brown Brothers Harriman wrote, "For now, we expect range-trading and consolidation to continue, but we believe that the buck will resume its strengthening trend".

The dollar hit a six month high against the 15-nation Euro on Tuesday (26 August 2008) and surged to 25-month high against pound as two US economic reports turned out to be better than expected, while business and consumer sentiment sagged in Germany. The Euro plunged to $1.4569 its lowest level since February 14 before recovering back to $1.4650 in late New York trading. A day before, the Euro was worth $1.4756. The British pound fell to its lowest since July 2006, at $1.8329 before recovering to $1.8389. A day before, the pound was worth $1.8525. The dollar also rose from Japanese Yen 109.35 to 109.63.

The dollar lost ground against the 15-nation euro on Wednesday (27 August 2008) after hitting the six month high the previous day. The euro bought $1.4692 in the morning European trading, up from $1.4650 in the late Tuesday New York Trading. The British pound rose to $1.8420 from the previous day level of $1.8389. The dollar also lost ground against the Japanese Yen, from 109.63 Yens to 109.22 Yens. .

The international currency market reports suggest that the dollar is actively engaged in off loading its perceived weaknesses against other currencies, and continues to be the focus of global economies.