2004-01-05

Lose The Dollar – I

Say goodbye to the global reserve currency.

The country’s foreign exchange reserves had recently accumulated $100 billion dollars for the first time and this has been a cause for celebration all around. Nobody has mentioned the fact that our country had lost tens of billions of dollars because we had parked most of the reserves in dollars.

Since much of the world trade is denominated in dollars, central banks around the world have been buying up dollars to prevent their currencies from appreciating. The Reserve Bank of Indian (RBI) has been following a similar policy because it does not want Indian exports to become costlier for American importers. But, the value of the dollar has been falling steadily as deficit in the US economy widens and as the American Federal Reserve continues to keep interest rates low. Foreigners have been abandoning dollar assets and moving towards to European and Asian stocks, and even gold. The dollar used to trade on par with the Euro (€1 = $1). Now, the rate is €1 = $1.25. In this context, the $100 billions that is in the reserves is only worth what was $80 billion when €1 = $1. Had the reserves been parked in Euros, then €100 billion would have fetched $125 billion today. True, not all of the reserves is in dollars, but most of it is.

The RBI needs to know that the American Federal Reserve has been printing dollars feeling safe in the belief that people in foreign countries will continue to accumulate dollars. George W. Bush is likely to win another term and the deficit in the US is likely to grow bigger. If and when some country with a huge foreign exchange reserve decides to switch wholly or partly to the Euro, it will lead to a stampede where the dollar will crash even further and our forex reserves will continue lose value.