A WEAK DOLLAR- THEIR MONEY, OUR PROBLEM

A former US Treasury Secretary coined a phrase that stuck when asked what his government would do about the weak dollar; “it’s our currency but it’s YOUR problem”!

That pretty much sums up the situation today. The US dollar has hit a recent low against the Euro and the Pound Sterling but the US Federal Reserve Bank is none too concerned as it concentrates on warding off the impending recession and credit crisis. This is a complex situation that is as much beneficial as it is dangerous for the American economy.

A weak dollar makes American exports more affordable but it increases the price of oil and hence ultimately all goods. The dollar is not just the currency of America; it is the currency of the world much like the ancient Roman Sistirci or the Pound Sterling of years ago.

The world economy moves in sync with the US economy; when it’s in good condition so are we. When the Americans sneeze, we get a cold; we are all interlinked in the globalized economy where no man is alone. The dollar has been on a downward trajectory for more than a decade.

As a result of the rise of China, American Treasurers have sought to lower the value of the dollar in order to compete with Chinese exports, which are made at a fraction of the cost of their American competitors.

The US in the nineties found its manufacturing sector losing out to its Chinese counterpart while its economy became weakened by home industries relocating to cheaper locations like Vietnam and Mexico. Though the American exports could compete in terms of quality when it came down to just cost they were outdone.

When the former Chairman of the Federal Reserve Bank at the time, Alan Greenspan, one of the greatest economists of our time, moved, markets jumped. He watched, year after year, as the dollar slid against all major currencies leading to people assuming this was actual policy. For, it was assumed, the maestro would have acted if he thought that it bad for the economy.

Now retired, Alan Greenspan has since predicted that the dollar will lose even more value. US exports begun to rise in turn with the dollar falling; now American exports were out competing their European counterparts with British exports suffering the most due to the strong pound.

The weaker dollar saved many manufacturing sector jobs which were being shed as volumes rose while profits remained the same. This led to a large section of manufacturing firms going out of business; this period coincided with the consolidation of the sector as larger firms bought up smaller ones. Once the exports were tied to the lower dollar there was little chance of the dollar rising again.

In most Third World countries the dollar is the unofficial currency, accepted without exception. A number of countries (13) peg their currency to the dollar. Most international commodities are bought and sold in dollars be it oil, steel, wheat, you name it.

Oddly, the majority of dollar bills are in circulation outside the borders of the United States. China is estimated to have more than a $1.43 trillion in State coffers and it is using this war chest to buy influence in the Western economy like its recent purchase of 15% of banking giant Goldman Sachs. The America Treasury isn’t happy about this but is powerless to act as it can not force the Chinese to return their hard-earned dollars.

Money is a curious thing; just a piece of paper that we all agree is worth whatever we say it is worth. Right now the dollar is low but it still has the safest value of any currency. It is all about time; eventually the dollar will rise and some lucky person will have more money than they had before, just like that.

The real problem is not the dollar but the potential recession in the US and the world in general. If there is a global downturn then it will not matter how low the dollar is. The main factor in all this is rarely spoken about; the dollar though by far the most dominant global currency, is no longer the main reserve currency. Central banks now spread the risk by investing in a basket of currencies as opposed to the dollar exclusively. The market has responded to the weak dollar by diversifying into commodities; oil, steel, gold, wheat and even water are at record prices for peace time.

The dollar has wildly fluctuated against various currencies; against the pound sterling it’s almost lost twice its value. Against the Euro, it started on parity when the Euro was enacted in 1999, to $1.48 to the Euro. The most serious deficit is with the Chinese Yuan despite China’s refusal to revalue their currency. The Japanese Yen has also been re-valued and is really high against the dollar adding further pressure.

A credit crunch is looming and a weak dollar might help the situation by softening the impact as billions of dollars are written off in bad debt. It is better if that bad debt is in weak, not strong, dollars. The Federal Reserve under Ben Bernanke has been heavily focused on cutting interest rates to make money available to banks; the weak dollar has been a secondary concern.

Rwandans have been seeing the effects of this weak dollar as the prices of basic foodstuffs and imported goods have been creeping up, the rise of oil prices is another pressure. When one goes to the market you now get slightly fewer tomatoes than you got last month; the tomatoes require petrol to drive them from farm to market and petrol is pegged to the dollar.

Here is a table showing the average price rises of basic goods

Product

Previous price

Current price

% increase

Salt

Frw100

Frw140

40%

Soap

Frw50

Frw100

100%

Potatoes

Frw100

Frw120

20%

Tomatoes

Frw400

Frw500

25%

Beans

Frw300

Frw400

30%

Peas

Frw600

Frw1,000

66%

Beef/kg

Frw1,000

Frw1200

20%

USA oil

Frw2,900

Frw4,000

38%

Basmati rice

Frw5,000

Frw6,000

20%

Charcoal

Frw5,000

Frw5,000

0%

(Source: New Times)

What this table shows is that traders are speculating and increasing prices at a higher rate than the rise of the price of Oil or the fluctuation of the dollar.

When one tries to rent a house is an affluent area of Kigali, the price is up because it is measured in dollars. Anyone involved in import/export is affected, retailers are affected and ultimately customers have to pay higher prices. From New York to Nyabugogo, the wheels of the global economy grind swiftly and affect each other; we are connected and intertwined. The weak dollar is a momentary blip in of a problem; Rwanda will go regardless, as we are caught in a full economic boom. Rwandans will also diversify the hard currencies they use in importing/exporting as the Euro has gained local value. The weaker dollar is better for Rwanda as investors can get more value for money in Rwanda. As inevitably as the sun will rise, so will the dollar, as it will be the world’s premier monetary unit for the foreseeable future.

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