Is the recent dollar rally over?
The US currency rose against its peers after the collapse of investment bank Lehman Brothers in September as panic-stricken investors used their money to buy safe US government bonds, even though the US is in deep trouble and its trade gap is too high for comfort.
Now, the dollar has lost ground against the yen, the euro and many other currencies, including the Indian rupee. The reason: US short-term interest rates are now close to zero, which makes it less attractive to hold dollar assets.
The dollar is the de facto global currency, and the fall in its price will unsettle other parts of the global economy. Japanese and European exporters will be hit by a surge in the yen and euro. There will be pressure on their central banks to either buy dollars or cut their own interest rates to zero. China could do something similar. The rupee could be caught in the crossfire, forcing the Reserve Bank of India to stop selling dollars and buying them in the coming weeks.