Saturday, July 3, 2010

UN raises voice to ditch Dollar as an international currency.

I just received a mail yesterday, while I was in my office, that the UN has called for ditching the dollar as an internationally accepted currency. Suddenly my mind started racing ... what would be the effect of such a step in International Economics and International Business.

I asked my canteen incharge, Tapash, for a cup of coffee. I sank into the huge leather sofa in my office, all alone, sipping coffee and thinking of the repercussions. From my understanding of International Finance and Exchange Rate dynamics, a fall in the overall acceptability of US dollar will result in the decrease in demand of dollar. Countries holding dollars in their foreign exchange basket will try to sell them off, resulting in an excess supply of dollars in the international market. Unless the Obama government takes a huge initiative to buy back the dollars at the existing rate, the price of the dollar, i.e the Exchange Rate of dollar is sure to fall. Dollar will depreciate.

Now, what happens if dollar depreciates? In this era of Globalisation, some countries trading with the US will have a trade surplus. Definately good for the Indian Economy. But the US economy, who haven't yet recovered fully from the Financial Crisis, will further sink. The US government will definately try to recover, with the Federal Reserves decreasing the Rate of Interest, and the US government reducing their imports. The latter is critically important, as the US will suffer greater losses with imports in the era of Exchange Rate depreciation.

Now, lets see the very important repercussion. China is the major trading partner of the US. A decline in the imports of the US means a decline in the exports of China. China, who boasts of their GDP growth rate hovering around 10%, will suffer a setback, since the growth of the Chinese economy is mainly fuelled by exports. So, the Chinese growth will be hit. Contrastingly, Indian growth is mainly domestic demand driven. So, the Indian economy won't be severely hit. We definately do have a fair chance of overtaking the Chinese economy in the growth rate of Real GDP.

Looking forward to the coming few months. I will definately revert back to this issue in my next posts. Until then, lets keep our fingers crossed.

The question that remains is ... Is it time to end the Monopoly???

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