The non-stop decline in the value of the US dollar against other major currencies has emerged as a grave issue for international commerce. The highly politicized greenback has declined by almost 15 percent over past 12 months.
Since most assets and banking transactions are calculated in this currency, its systemic weakening has put the global economy under sustained pressure.
Use of the USD as premier currency in international commerce dates back to the early post-World War II era. At the Burton Woods Conference, the US managed to engineer the coming economic order due to its powerful economy, and by drawing upon Europe’s weakened position because of the devastating war.
Then America was the most powerful and wealthiest country. Washington was also the biggest lender during those years.
However, the world order changed in the late 1960s and early 1970s after the emergence of structural problems in the US economy compounded by heavy military spending.
The political weight of the dollar changed after the dollar-gold link was eliminated during the presidency of Richard Nixon. Since then major currencies such as Deutsche mark, Japanese yen and later on the euro attracted higher attention.
Having said that, the health of the USD has never been so unstable as has been over the past year. During the months it has become thinner by a massive 15 percent against Asian and European currencies. It reached its lowest level against the euro after the Europeans introduced their single currency in their dealings with the world and gold was traded for its highest price in almost three decades.
Economic pundits attribute a whole set of reasons for the declining value of the once mighty dollar. The determining factor most say is the deepening deficit in the US trade balance.
The deficit is over and above $730 billion of which $200 billion is related to the superpower’s trade balance with China.
In other words, the US borrows $2 billion from other countries on a daily basis to pay for the unquenchable thirst of its consumers.
Sale of US bonds and assets to foreigners is the underlying result of the systemic deficits in its balance of trade.
America’s ballooning national debt is another factor which is hurting the dollar perhaps irreversibly.
Today America owes more than $5 trillion or almost half of its Gross Domestic Product (GDP) to foreign and domestic financial institutions and governments.
The pattern of events has, among other things, dented public confidence in US economic stability.
True, the world’s largest economy is still considered attractive for foreign investors and those with big money. But the previously dominant dollar has long lost its sparkle.
At any rate, with the continued decline in the dollar, 15 percent of the power of US assets and holdings has all but disappeared.
The US, nevertheless, has managed to expand its exports on the back of the shrinking dollar and decrease the cost price of foreign products and to some extent tame its yawning trade deficit.
Amid all this, those well-versed in the bourses and currency markets have understandably ventured into gold and oil trade instead of the poor dollar.
Needless to say, oil exporters are piling up losses because the black gold is traded in dollars.
The questionable relationship between the cheap dollar and expensive oil shows that the rise in international crude prices has not brought much gain for oil exporters.
If current oil prices (close to $100/barrel) are compared with the value of the USD in 2002, a barrel of crude will hardly be tagged at $46.
Isn’t this the time for member states of the Organization of Petroleum Exporting Countries to demand more stable currencies for their oil instead of the limping greenback?
If the answer to this question is in the affirmative, it should, however, not be forgotten that cutting off the oil-USD link will further weaken the dollar and could add to the existing problems.