The Resilient Greenback

By Archish Mazumdar

Edited by Madhavi Roy, Senior Editor, The Indian Economist

Ever since the financial crisis that shook the world in 2008, reports, predictions and speculations have abounded as to the dollar’s weakness and apparent demise. As the US economy sank into recession, investor confidence that the once everyone’s favourite currency could hold onto its No. 1 position sank along with it. With its global supremacy on the decline, policymakers around the globe rallied against the dollar-dominated global financial system. Terming it as detrimental to global economic stability and vowing to find another suitable substitute. Even emerging nations took up the fight, complaining that the American Dollar’s primacy allowed economic policy changes in the US to send shockwaves not only in their economy but the world economy in its entirety.

Back to the present day. Six years have passed since the crisis, and the dollar is showing how resilient it actually is. The dollar index, which measures the greenback’s value vs. a basket of other currencies has effectively reached a four-year high. And those policymakers who had been bitter critics not so long ago, are still reluctant in dumping it.

The newfound strength of the U.S dollar makes perfect sense though. Even though with new and emerging currencies like the INR and Yuan may one day rival the USD, but the buoyancy of the greenback reflects present market sentiments wherein the USD remains the lone bright spot among the world’s major economies. With an annual GDP growth of approximately 3.5% in the third quarter- far greater than the other industrialized economies- the Federal Reserve has too wrapped up its highly unorthodox economic stimulus program known as Quantitative Easing, QE. In fact, it was the QE, which by spilling a huge amount of dollars into global financial markets, was one of the primary factors behind the USD’s recent weakness.

Meanwhile, most of its primary competitors seem to be going in the opposite direction. The European Central Bank (ECB) is set to unleash its own QE program to try to combat potential deflation and try and kick-start the sagging growth in the euro zone.

While in Japan, the central bank surprised many on Oct 31 by greatly broadening its own monetary expansion program in an attempt to rescue Prime Minister Shinzo Abe’s stumbling initiatives to revive the long dormant Japanese economy. As a result, the yen has tumbled to a seven year low against the dollar at 112 at present, with predictions flowing in that it is set to go down to about 120 by end of 2015.

The dollar, on the other hand, has also been gaining ground against some of the emergent market economies as well. Faced with sagging growth and the strain of economic sanctions, Russia’s ruble has been continuously hitting all-time lows against the dollar. While the currencies of India, Indonesia and many other emerging economies still have not recovered their strength from when they tanked last year.

But the question still remains, “How long can the good times roll for the U.S. dollar?”

That depends on a number of factors though. From the future growth of U.S. GDP to the health of the global economy and upcoming Fed decisions on interest rates. Yet with central-bank policy in the most advanced economies sharply diverging — the Fed tightening, the ECB and Bank of Japan (BOJ) loosening — the dollar could see continued gains. Some economists believe the conditions are in place for an extended period of dollar strength. “The building blocks are still in place for a sustained dollar rally,” analysts at financial giant Barclays concluded in a recent report.

The fact also remains that no other currency has emerged to truly rival the dollar’s supremacy. The uncertain stability of the euro was exposed by its multiyear sovereign-debt crisis and the chaotic response to it from Europe’s leaders. And even though Beijing has high hopes to transform the Chinese currency, the yuan, into an international powerhouse, policymakers there have been extremely slow to introduce the financial reforms that would make that a real possibility.

Of course, there are still long-term factors at play that could chip away at the pillars of dollar dominance. For instance, Russia and China recently pledged to settle more trade relations between the two nations in rubles and yuan. But for now, the dollar reigns supreme, as well it should.

 Archish Mazumdar is your normal everyday college-kid, currently in his third year of college, pursuing a BS in Economics from IIT Kanpur. His passions in life include quizzing, debating and food! Quick in both words and actions, he usually finds solace while writing (mostly poetry). He spends his free time reading vociferously, watching movies (plenty of them) and listening to Bob Dylan. When not doing the usual stuff, he is mostly found convincing people that he is not actually jobless.