Mon 28 Jan 2008
A full-blown dollar crisis on top of a credit crunch and a weakening economy would be frightening. Thankfully, it need not happen. A lot of pressure is being put upon some Governments and, by extension, the Central Bank, to revalue the local currency exchange rate in relation to the US dollar.
Some financial experts are calling for a revaluation, one to take account of the dramatic decline the dollar has suffered over recent months.
Other financiers are saying the time has come for their currency to be del-inked to the dollar and set against a basket of currencies which would reflect a more realistic value of their currency on the world market. So far these calls have been resisted by many, for a number of reasons.
It is not sentimentality that compels a currency to retain the US dollar as its peg, but there is a recognized historical reason for doing so. Until recently, many Gulf countries relied solely upon exports of crude oil and refined products for its export earnings to support the economy.
Oil was and still is traded in American dollars so it made a lot of sense for Gulf , as nascent nations and emerging economies to link its currency to that with which most business would be conducted.
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Historically also, downturns in the US economy tend to be short-lived and recognized as such globally, as US recessions are looked upon as only temporary, perhaps lasting no more than the term of a particular prezident, allowing the US to pull itself out of the mire. This is why America is looked upon as the motivator behind the global economy.
Bankers and government officials are aware that the present situation makes life very difficult for everyone, especially for the middle and low income group. But revaluing their currency will be only a short-term solution that will need constant reassessment, creating yet more uncertainty in the market.
