I can well understand the role of the Swiss Franc in the European economy. Of late it has partially taken on the role of a world currency as well, trying to position itself as an alternative to the beleaguered U.S. dollar.
But, what happened last week is difficult to understand.
The Federal Reserve stated that it is afraid that it would take many years for the U.S. economy to recover. That hit all the major stock market indices around the world. Understandable, correct ?
But, the U.S. dollar appreciated against most currencies last week. Even against strong currencies like the Singapore dollar. I thought people will flee the U.S. dollar, given the perilous state of the U.S. economy. But it was not to be.
The Singapore dollar depreciated to SGD 1.29 to the USD. The Indian Rupee had the steepest fall in over two years, it fell to nearly INR 50 to the USD, and is expected to fall further next week.
So, what’s going on here ?
Why would a currency under siege appreciate ? Why is the USD considered as a “safe” currency in today’s state of the American economy ?
The answer lies in the currency traders’ minds, I guess. They must have correctly guessed that most of the world and almost all of the major trading currencies will be in trouble for the next year or so, if the U.S. economy gets into almost irrecoverable status. Where would you export, if the world’s largest economy cannot absorb the exports anymore ? If the Americans simply stop importing (which they cannot do), then the Chinese, Germans, Indians and French will be in deep trouble.
One way to ensure that the U.S. continues to import is to make the imports cheaper, and that can happen if the U.S. dollar appreciates against the major trading partners of the U.S. I am not sure if this is the reason, but this could be one of several factors affecting world trade.
For service economies such as India, the export billings for software services would translate into a better bottom line as the Indian Rupee depreciates, but the Indian import bill will correspondingly rise hitting at high-consumption products such as crude oil.
It is interesting to see what is happening, but I believe that this would be a short-term phenomenon, lasting not more than 60 to 90 days at the most. In the meanwhile, hold your U.S. dollars – they might just become more valuable in the very near future !
24th Sept 2011