US dollar has come off its lows against the Euro in the current year but it is unlikely to record substantial gains in the near term given the fact that its reserve currency status has been questioned. Will the rising supplies of greenback, thanks to money printing binge adopted by the US Fed ward off the recession and recapitalize the ailing banking institutions cap the gains for the US currency? The dollar has rebounded from a low of 1.4300 to trade around 1.3850 against the Euro in an impressive swirl post the less than expected slide in the US non farm payrolls data. This has capped the runaway rally in the global asset markets and there is a possibility of the correction in equities as well as commodities if the strength in greenback extends further from hereon.
Ever since the recession began at the start of 2008, the credibility of Dollar has been questioned time and again. Whether Dollar is a good reserve currency? What will be the fate of Dollar? And how long the recession will continue? Do the countries that have vested interest in Dollars ask the common questions?
Brief History Of Dollar Emergence:
During the mid 20th century the conference of Bretton woods established the financial relations between the industrial nations. The exchange rates at that time were fixed in terms of value of Gold plus and minus 1%. The system collapsed on 1971 and this brought Dollar in the forefront of the world economy as a “Reserve currency”.
Dynamic Change In Berth Of Dollar :
The situation has transformed itself in the year 2009 from the one in the 1950’s- a time when dollar took over the reigns of the world’s reserve currency from the British Pound. At that time capitalism was creating problem with huge surplus of trade in front of US. The story now is that US is facing large deficits and creating a headache for itself and the world economy. The recent report from the US bureau of economic analysis said that U.S. trade deficit increased in April with exports and imports both declining.
Exports in April declined by $2.8 billion compared to March. Imports dropped $2.2 billion in the month. The total deficit grew from a revised March estimate of $28.5 billion to $29.2 billion.
US Dollar got the benefit of being a World currency until 2008. Huge amount of investment in US treasuries that was earlier considered a safe bet got a jolt from the sub- prime crisis. Most of the countries were affected by the degradation of the state of economy in EUROPE and US.
G-8 Summit Gives Fresh Indications Of Reducing Dependence On Dollar:
The glimpse of impact of recession was seen in the recent G-8 summit in Russia. The BRIC countries (Brazil, Russia, India and China) discussed about the options of buying bonds between the group and swapping their currencies with each other in order to reduce the habituation of Dollar. “The leaders of the so-called BRIC countries will discuss measures to promote regional currencies, including "possibly placing part of reserves in the financial instruments of partner countries," Arkady Dvorkovich, a top economic adviser, told during the meeting in Russia.
Russian President Dmitry Medvedev raised his voice on the creation of a supranational currency. Medvedev reiterated the intention of supranational currency and also asked China and other member countries to use the common currency. China as known has invested huge amount of money in the US treasuries and faces the risk of slump in the value to a large extent.
Major developed and developing countries have already cropped their purchases of Us treasuries during March and April 2009.
Dollar Movement Against The EURO:
The dollar movements against the EURO have been more on a downside rather than a upward buoyancy. The trend has been going strong since early March 2009 when Dollar was at 1.2651 against the EURO. A change in direction was seen, from end of March till 20th April 2009 when Dollar recovered against the EURO. From a low of 1.3737 on 19th March 2009 the greenback touched a high of 1.2883 on the 20th April 2009. This was on account of some short covering in the EURO and news in between of economic recovery in the US. But since than it has been a constant trend of rising bottoms in the value of EURO. The US dollar currently hovers around 1.3850 against the EURO.
The Degeneration Of US Mortgage Rates:
US mortgage rates have dropped considerably ever since the Sub-prime trouble began. The US mortgage rates were in the region of 6.07% during the last week of December 2007, the same now hover at 5.52% in June 2009. The fall in the mortgage has been the resultant of the lower yields from the US bonds, which are linked to the mortgage market. The rates have however recovered from 5% at the end of May 2009.
US Obligation Towards China:
US got obliged when it was receiving huge sums of money in the treasuries from the Chinese government. The other side of the coin is the fear, which China is facing on the value of those treasuries. China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March. Us treasury secretary has time and again reassured the Chinese government that their investments are safe. The problem in front of China is that the huge amount spent by the US to revive the economy will bring the fear of inflation. We have deliberately skipped the word “BUDGET DEFICIT” in narrating the stimulus packages because it is so obvious that the budget deficit is already bellying and further stimulus packages will heighten the risks for Dollar.
What Is Expected From Dollar In Day’s To Come?
Don’t expect much from Dollar in the coming days. The greenback will be facing pressure against the majors in the near future. Even if there are contrary moves in the Dollar, it should not be taken as a trend reversal. The Dollar is expected to move in the range of 1.4263-1.3524 against the EURO.
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