Saturday, October 24, 2009

DOLLAR FALL- SMALL BENEFITS BUT LONG TERM PROBLEMS



American exporters, whose goods have become more competitive abroad, are happy with their weaker currency.
Falling dollar is now a boon for US economy but at the same time a major concern for replacing the green color with some other currency. If we look into the invisible benefits of falling dollar we find that US is the only country enjoying the benefits of falling dollar where as other countries are crying over it.We have few issues on the table regarding free fall of dollar.
1.Benefits of dollar fall to US and other countries,
2.The riiple effect of further fall of dollar,
3.Indain effect of dollar fall and
4.The oil price increase due to dollar.
In this article we will try bring foward some of the invisble facts and analysis of the above issues.

Low valuation of dollar helps to boosts exports. The falling dollar increased the export of US. The export sector is one of the best performing parts of the US economy, creating jobs and boosting domestic demand. Job creation is now one of the prime agenda of US government where unemployment is 9.8%. If exports increase then more manufacturing will happen resulting more job creation. US struggling with its never ending and rising unemployment benefits. These benefits are draining out the hard saved US citizens’ money which Federal Bank has collected via taxes and etc. Free falling dollar might not go for a longer time but still it can give new turn around to start the industrial activity of US. Similarly domestic producers may be cheered that rival, imported goods are more expensive. A lower dollar means goods cost less outside the U.S., which could spur U.S. exports. If overseas sales of U.S. goods increase, that could mean production at U.S. factories would need to increase and put some people back to work.So does US deliberately wants to keep dollar fall so that it can build its economy.
On the days when risky assets fall, the dollar tends to go up. When risky assets rise, the dollar falls. The dollar has fallen fairly steadily since March, a period which has seen stock markets enjoy a phenomenal rally.
The chart below, shows  the current index is being calculated by factoring in the exchange rates of six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. This index started in 1973 with a base of 100 and is relative to this base. This means that a value of 120 would suggest that the U.S. dollar experienced a 20% increase in value over the time period. This level of dollar is being taken advantageous for the world economy.But currently in the chart we find dollar USDX at 75 which indicates critical high alert for other countries economic growth.



At the same time we should not forget that falling dollar have happened due to the large fiscal deficit and trade gap of US. But despite of all these US economy will benefit from this fall. Historically all countries have been making their currency grow at the cost of rising dollar and also on the citizen of US. Exporting countries sold their goods in US and sending the US made products to dustbin. After the fall of dollar US products are again getting their place back in the shelves of the shops.
The boost from net exports could be a significant factor in maintaining rates of economic growth. Imports will get negligible response, consumption a boost and investments a shot in the arm (as capital goods import becomes cheaper). A weak dollar will also reduce imbalances across the globe, forcing the US to import less and the Asian countries to encourage greater consumption. We already find that trends of export of wolrd have taken hit and is inclined to fall more due to falling dollar.The below chart shows the trend of world export.If dollar further falls exports will decline like anything of the world market.
EFFECT ON INDIA
For India, a weakening dollar has already had a substantial impact on exports because more than half of Indian exports are dollar-denominated. The real losers are sectors such as textiles, gems and jewellery, leather and handicrafts where the majority of the industry is in the small-scale segment and the companies have neither the balance sheet strength nor the financial leverage to make use of such advanced financial techniques such as hedging not to forget the tier-II IT companies, which work on slim margins. The below chart depecits the picture of current position of the India's export.Big Indian software companies are stepping up their hiring of American tech workers, who have suddenly become a lot cheaper to employ.We hold about $160 billion in foreign currency reserves. Most of it is reportedly in US dollar-denominated assets.falling dollar translates into a fall in the value of our currency assets.

A continual depreciation in the US dollar will reduce living standards in America; there is also the possibility of declining competitiveness in the long term. However, the depreciation has come at an opportune moment. With the prospect of recession and large current account deficit, the weak dollar is ironically helping to make the US economy stronger.
Although it is worth pointing out, it is making the economy stronger from the demand perspective; it does nothing to address the underlying problems facing the US economy. In other words the free fall of the dollar is a short term benefit but if it continues it will have worst effect on US economy in the coming days. But the real crisis for the US will be what happens to the dollar once the Asian central bankers start to sell the US treasury bonds, which they have hoarded over the years. This will result to increased supply of dollar making it rise and sending US economy in trouble waters.The US is in a win-win situation, as a result of the strategic bind in which reserve-rich economies find themselves. If countries China, India, Japan and Russia,  start shifting their reserves to other currencies, they face the risk that that very act could depreciate the dollar by reducing the demand for it. In consequence, they may find their reserves losing value.It seems that US is playing with dollar.

OIL IMPACT
In the coming days we might get oil breaching the level of $100/barrale since the free fall of the dollar have a negative correlation with oil price. Since crude oil is currently priced in dollars, the price of the world’s most precious commodity climbs as a result. Oil have fundamental reasons to go up due to increased demand. But here we try to find out the weak dollar ripple effects on oil prices. US dollar is the only currency to buy oil. Dollar devaluation increases inflation in the oil producing countries. Statistical analysis indicates that, among 18 oil producing countries, inflation was associated with dollar depreciation in 14. The four countries that did not fit this pattern were those with diversified economies, other major sources of income beside oil, and currencies not pegged to the US dollar. Dollar devaluation reduces drilling activities in areas where most of the costs are denominated in non-dollar appreciating currencies such as the North Sea. It also reduces drilling activities in the oil producing countries. So crude is the next item to heat over and increase the commodity prices across the world sending inflation more than expectation.
Free fall of dollar might bring some relief to US but not to the rest of world. It will be now interesting to watch how other countries deal with falling dollar.Moreover how long US will play with dollar.

2 comments:

H@RdiK

nice analysis of dollar impact

Metalda

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Lucy

http://forextradin-g.net

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