The Fate of Currencies Pegged to the Dollar
Michel Morkos Al-Hayat - 20/09/07//
The US dollar represents a major economic axis in many a country worldwide. Most of them have pegged their national currency to the dollar, believing the currency of a country such as the United States would remain sturdy seeing as it has one of the strongest economies in the world. So it came to be that the currencies that were pegged to the dollar were affected by its fluctuation, however the greenback became unstable. In the last two years, the dollar began its recession, dragging down with it these satellite currencies. They began to pay for this through a loss in their value that is, at the very least, equal to the losses incurred by the US currency. Sometimes the losses exceed those of the dollar depending on the currency's strength or vulnerability in the face of the dollar or other major currencies.
Central Banks in these nations therefore keep an eye on the movement of the dollar but do not know what procedures to take in terms of the exchange value of their national currency. For political and economic reasons, very few nations have relinquished their peg to the US currency; they have forged links to a basket of major currencies, including the dollar, and imposed burdensome factors that are comprehensive. These factors differ and balance out according to the weight of each currency; so if the value of one or more of them recedes, this is recouped by the gains of other currencies that are not losing.
The effect of the collapse of the dollar is not only limited to the Euro, yen or sterling pound, when measuring the market value of each of them. Rather, the weakness of this currency and its activity includes over 65% of the world's economies. It will bring to these economies the effects of inflation that eats away at the improved growth and consumes the value of the national currencies. From the beginning of 2006 until the present, the US dollar has lost about 20% of its value, 7% of that in 2007.
The impact of this corrosion hides behind it the false glitter of the world economy. It cannot be rinsed off except by comparing what it is achieving in terms of a major nominal growth, and its credit lies in real growth, or it impacts the major economic indicators. The recorded growth in trade budget surpluses in some of the major countries that deal in the dollar is far below what the dollar lost in real value this ear. This means that the surpluses have fallen in tandem with the pegged price. This recession applies to other monetary clusters. For the financial surplus lies in the Central Banks and the liberalized deposits in US dollars are corroding-- their value no longer equals the gains achieved virtually. The fiscal surplus in China, despite reaching a trillion dollars, remained at the level it was at in 2005, i.e. 800 billion. The liberalized deposits in dollars, in a small country such as Lebanon, lost their value to a greater degree than the gain achieved in its bulk.
What is hurt most in this case are the lump sum wages earned by laborers and employees, for they are no longer equal the same value they did two years ago, or since the beginning of this year. They fell victim to inflation and to the price of goods imported from countries using Euros, sterling pounds, yen, and Australian or Canadian dollars, among others. Such corrosion is cause for social misery that countries cannot face by making up for the losses incurred to wages. With the exception of oil-producing and exporting countries, governments (even if they were capable of raising the salary scale at a par with the level of the losses or the inflation that happened as a result of the rise in prices) then it cannot throw on the private sector the burden of this increase because the sector is paying an enormous price with the increase in production expenses. This precludes it from achieving the competitive advantage stemming from two factors: quality and price, and is hence powerless to achieve real and balanced growth.
Whether the rise in fuel and oil prices is a result of the recession of the dollar or a result of other factors, its full weight also bears down on world growth. This growth, subjected to the pressure of economic crises exported by the US or under the pressure of the world price of oil and its reason is the depleted US reserves and climatic tornadoes hitting this superpower or the destruction of the recycling technologies there, this growth is slowing down due to these aggregated crises.
Hence what befalls the world economies as a result of the falling price of the dollar also strikes the economies of those countries that have strong currencies rising in its face. EU countries with sturdy economies are fearful of a recession in their exports and a recession of their economic activity would lessen the chances of new business opportunities. If those mother countries that have the major currencies are capable of absorbing the impact of the collapse of the dollar and rise in oil prices, and deal with the effects of the economic crises, then the countries most susceptible to economic crises and being hit by huge shocks are those countries that deal in any of these currencies, or link their currency to the dollar, or buy Euros or pounds and then use a weak currency to ace the flow of products and goods from a source that deals in strong currencies. The growth indicators in these countries, with the exception of the oil-producing countries, decide the future trends of US currency. Most probably they will suffer economic hardship that holds them back from the expected good growth rates. These countries will pay the price for their industrial and agricultural production and will not be at the same competitive level seeing as the primary resources, or those which are partially manufactured, or needed fittings or products used in production processes like fertilizers and pesticides, will be expensive compared to the national currency of each country.
A simple mathematical operation done from the day these countries tied their currencies to the US dollars, will show the extent to which their national currencies were victimized by the "monster currency" over the course of 25 years and how much it has fallen along with it; to the extent that all the oil revenues that are surplus to the needs of the producing and exporting countries, has not exceeded, in buying power, what its levels were since that date, with the exception of what was achieved by increasing the quantity.
Hence, breaking the peg between the currencies and the dollar seems to be the best guarantee, with the condition that a balanced basket of currencies is sought after, or an united currency is adopted within strategic economic regions, of which the Gulf Cooperation Council countries are considered an example.
*Mr. Michel Morkos is Director of Al-Hayat business desk.
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