My Virtual Diary

One may ask why the rest of the world is so bothered by the weakening of the USD value this year?

Historically, the international monetary system established at Bretton Woods just before the end of World War II set the value of the USD in terms of gold.  The values of all the other major currencies were then stated in terms of the USD.  The practical reasons for the continuing central position of the USD are the several functions it has come to perform in the world.  It is the main central reserve asset of many countries.  It is the most used vehicle currency for international trade and investment.  Among the reasons why the US$ is in great demand worldwide is its universal acceptance.  If one travels internationally with USDs, the currency is welcome everywhere. 

In the light of the weakening USD, foreign creditors and suppliers may become reluctant to accept the said currency.  An increasing volume of world trade denominated in other currencies would cause losses for American companies and banks.  Politically, pressures could build up for protectionism, exchange controls, or restrictions on capital flows.  A large debtor country of US could not remain a major reserve currency economic power for long, and America’s power to affect world events would erode. 

I now foresee how headaching is the career path ahead of me.  As part of finance team of an international company, I have to be aware of many financial forces that originate outside the company.  But even for such forces, the concerns of the domestic manager are of a different magnitude than the concerns of an international manager because the domestic manager has to cope with only one country, whereas the international manager has to cope with two or more countries.  The same may be said of accounting principles, which differ widely from country to country.  Fluctuating currency exchange rates, currency controls, forex risks, government policies on international payments, tariffs are almost uniquely international problems that I encounter in my everyday work.  Special mention of China’s onerous and complex requirements and procedures.  I’m lucky I don’t bear much of its burden.  Our Beijing office happily handles that.  The devaluation of USD made me think to shift to depositing in GBP.  I am tempted to tell my clients to pay in GBP.  I remember myself incurring a loss due to fluctuating exchange rate of USD.  Nakakabuset as in.  Carelessness was also my fault.  I didn’t anticipate the risk. 

USD, the “world’s vehicle currency” which is able to control global economic momentum is now undergoing a downward direction.  This is in the light of the weakening of the greenback as the US Federal Reserve cuts rates aimed at draining liquidity problem out of America.  The underlying question is:  Is the US$ still the world currency?  For me, yes it is still the world currency because it still corners bulk of the world’s trade transactions.  But its status is shaky as seen in the months of decline.  This status, so to speak, may change depending on the move of US Fed and other central banks globally in the future. 

China Central Bank’s statement saying that the dollar is losing its status as the world currency, for me, is both based on plain observation and an economic strategy  (be it intentionally or not).  It’s natural for them to say something like that because China is a fast growing economy and needs more and more raw materials for its production and consumption.  Naturally, since most of the trade is expressed in dollars, the devaluation of the greenback will always be positive for their purchases.  That is, more raw materials sold in USD could be purchased with Yuan Renminbi.

Almost the same thing, French President Nicolas Sarkozy was quoted saying, “The dollar cannot remain someone’s else’s problem.  If we are not careful, monetary disarray could morph into economic war.  We would all be its victims”.  I agree with him.  Yes, the USD is America’s currency but remains to be majority of other countries’ problem.  Mr. Sarkozy’s statement, in my opinion, is that central banks should now begin to have a standby fallback in any case that the dollar continues to plunge.  The scenario assumed here is that Europe and/or Asia would dominate the world trade and these two continents would determine the world economic growth.  On that framework of thinking, central banks are also advised to have enough reserves of a stronger currency, one perceived to be the next world currency.  Then, we go back to trade volumes and demand.  Countries such as China and the oil-rich states in the Middle East are considering diversifying its foreign exchange reserves out of USD and into other currencies.  They have accumulated vast piles of dollar assets that are now losing value.  They may not totally dump USD but they learn that an alternative global currency needs to be in place in the long-term.  Iran, for example, has been lobbying to the group of petro-states to look at the option of pricing OPEC oil with reference to basket of currencies rather than USD alone. 

Households don’t like saving a currency that won’t hold its value.  Companies don’t like to establish globally-networked offices bases on a unit of account that fluctuates unstably.  Thus, the affected countries are contemplating on diversifying their currency reserves.

Export oriented companies are also facing the USD depreciation.  The falling dollar is a headache for the US-export-oriented firms as it drags down their export earnings.  In this view, the strategy is to diversify export destination.  Europe is a good market to penetrate to begin with. 

I find it not impossible for countries other than US to slow down, or worst, stop using the USD.  To keep the dollar status as a world currency, its value should remain high.  It’s in the Fed’s decision along with the movements of other central banks.  As countries continue to diversify the denomination of their reserves vis-à-vis growing China and Europe, retaining the US currency as the world currency is harder this time.  The subprime crisis must be a lesson to big spenders (like me sometimes).

Last year, I told my prof that the USD exchange rate will even go down to P48.  Now, it is even beyond 48.  I wonder if my prof pushed through withdrawing his USD account from the bank.  The last reply he said was “Please wag lang sanang bumaba pa.”

Another field that I am keeping an eye on is International Law.  I thank God I found a rescue.  My husband will take care of that.  Hehehe.  Mwah!