Save the dollar. If it falls further, we all will fall and that's the truth many refuse to acknowledge. Dollar doomsayers are rampant and widespread across the globe and there are a host of reasons supporting their argument. Crystallising those points, it can be said that never before has the United States economy been confronted by so many issues that are affecting their fiscal and economic report cards, businesses, individuals and government.

It is facing declining stock and real estate prices, increasing food, commodity and energy prices, trade and fiscal deficits, increasing unemployment and inflation, decreasing investment, stagnant productivity levels, low confidence levels, decreasing consumption, low savings level, increasing cost of debt in a credit dependent economy and failures major investment banks.

Okay, "dollar is doomed"; but is that in the greater interest of people? This is a tricky and complex question, with a lot of strings attached to it. Let us analyse a few.

First and foremost, it is ironical to learn that nations [most of them including the euro zone, the UK, India, Middle East] across globe are getting uncomfortable with the steadily decelerating dollar rather than the US itself. In fact considering the current account deficit [nation's expenses being higher than it earnings] that US holds, a falling dollar is good for the US economy. US Commerce Department recently reported that US current account deficit surged to record high of $856.7 billion (Dh3.1 trillion) in 2007. This represents a huge debt owed by the US to the rest of the world and constitutes to a whopping 6.5 per cent of the US Gross Domestic Product.

Since a falling dollar essentially makes imports costlier to the US consumers, [whose propensity to save are negligible in comparison to consumers in other nations] International Monetary Federation (IMF) and economic pundits feel that letting the dollar slide is a good way to shrink America's trade deficit at global cost. Global companies especially firms based in China are dependent on the US consumer's appetite to shop the produce manufactured in their country. Letting the US dollar slide might indeed make China more expensive for the US market. So was this slide in dollar intentional rather than being accidental due to economic crisis?

Dollar woes and global cries

Dollar is more than just a US currency and its slide signals problems for economies [directly or indirectly] across world. This is because global trade obligations and trading are predominately dollar based and is completely independent of the US economy. The rising oil prices, the high inflation in many nations are pointed at the declining value of dollar.

The solution – an alternative reserve currency; but that's where the problem lies. There has to be an alternative currency for global traders to increasingly get accustomed with. Euro is the most obvious choice, but it's too young to be completely believed as it is still in evolving stages [10 years old]. The currency has seen no major recession nor has it seen an explosive growth. Markets trusts on past data to rely and that is missing in the global arena. Dollar has encountered close to three recessions and an equivalent number of exponential growth periods and its still resilient to another recession.

Persistent slide in dollar has naturally propelled the European currency [euro] to historic highs. But that in turn has started to generate problems for the euro zone.

Strong euro declines the earning of export depended countries within the euro zone. Euro is also gaining rapidly against the yen (euri/yen is now quoted at 163.61). As euro surges against the yen, German car and auto manufacturers are reported to be loosing to their Japanese counterparts. Similar troubles emanate from the United Kingdom too. Traders in UK believe that a stronger pound would erode UK's export competitiveness and is already taking a toll on foreign demand for British goods.

The decline in dollar has also kindled the debate that most nations are steadily opting to diversify few of their dollar reserves to other currencies, especially euro, sterling pound, and also possibly yen.

Chinese forex moves matters the most in this case as 70 per cent of China's reserves, [which hit $1.76 trillion on April, 2008], is parked in dollar-denominated assets, primarily US Treasury and government agency securities. Any market wide mass exodus from the US dollar by the Chinese investors is highly feared as the probable final 'death knell' for the US dollar essentially because of the mightiness of the Chinese reserves. But that's easier said than done and the process of reserve diversification also seems to be happening at much smaller pace than actually propagated.

Statistics from the IMF reveal that more than 65 per cent of global forex reserves are still parked in US dollar and have been so for the past few decades. Diversification of currency reserves to include more euros, pound sterling or yen, does not necessarily imply sale of existing dollar holdings but rather can also mean the acquisition of less dollar as reserves continue to build.

A weak dollar is helping to make US stocks a good value for foreign investors.

It is surprising to note that, the rally in US stock markets is happening at a time when faith on the US economy is on decelerating mode.

Inflation

Decelerating dollar heightens the inflationary conditions in nations that peg their currency to the US dollar and Middle East nations top in that. For example, over the past four years UAE's dirham has been loosing its value against a basket of currencies ideally because of its pegged currency status. If dollar drops further then, the purchasing power of UAE dirham would drop further. The dirham has lost 14.36 per cent against the pound, 33.87 per cent against the euro and 17.81 per cent against the Indian rupee. With few chances of re-valuation in the Middle East countries, rapid dollar appreciation and stronger US economy would decline erosion of earning in a pegged currency economy.

High cost for residential spaces are pointed to be the prima facie driver of high inflation in Middle East, but there are more strings attached to it. UAE and other Gulf nations employ wide number of expatriates from more than 100 countries in various industries. Imports into a country with lots of immigrants will be higher than elsewhere as immigrants have a particular penchant for goods from their own country. Under such high imports, persistent fall of the dollar would only add momentum in pushing up imported inflation in the UAE.

The astronomical surge in a wide range of commodity prices is also blamed on the falling dollar. As dollar rises again, commodity prices may cool down gain, dragging down the high inflation along with it. In nutshell, stronger dollar and better US economy is a preferable condition for a wider number of people. So before joining the chorus of dollar bears, ponder how much that is eating into your pockets.

- The author is Assistant Vice-President on the Research and Trading Wing of Vision Commodities Services DMCC. The above views are his personal opinion.