The dollar has been the dominant global currency for over half a century, but has come under attack in the past year. A few months ago, the Chinese central bank governor suggested a world currency; other central banks including the Reserve Bank of India are shoring up gold reserves; and the dollar index, which measures the greenback against a basket of currencies, has lost some 12% in the past year. Mint spoke to foreign exchange commentator A.V. Rajwade about where the dollar is headed. Edited excerpts:
Do you see the RBI’s gold buying as a loss of confidence in the dollar as a reserve currency?
Partly, yes. It is an effort at the diversification of reserves. And for quite some time, there has been an inverse correlation between the dollar and the gold price. In a way, it is diversification but one wonders if it wouldn’t have been better to diversify in terms of the euro or the yen or whatever, rather than going into gold. When we say the dollar devalues, against what (is it depreciating)? It means that the euro and the yen are appreciating. (So) you might as well consider increasing (euro and yen reserves). Maybe there is a personal bias. I am not a big fan of gold.
Was the dollar’s weakening earlier this year because of dollar carry trade or were there more fundamental factors?
There is a dollar carry trade. The dollar’s short-term interest rates, at least for once, are lower than the yen’s rates. So, partly it was that, but I don’t think it’s only that. It was a combination of the fact that (the US has) the world’s largest fiscal deficit, a huge deficit on the current account still despite the fact that oil prices have halved compared with their peak.
People are still talking about whether the economic recovery will be V-shaped, W-shaped, L-shaped, whatever—all taken together was responsible (for the dollar weakening).
After depreciating for a long time, the dollar index is suddenly gaining strength. What are the factors driving this?
(It’s) very difficult to say what is causing this. But I don’t think that it (this gain) indicates anything much. Fact is, if the dollar further appreciates against the euro and yen, both economies are going to have major problems.
Instead of coming out of recession, any further strengthening of those currencies would create major problems for their economies. So what is happening is that the dollar exchange rate is correcting, but it is only against floating currencies. There is no correction against the currency, where it is most needed—the Chinese yuan. That is the biggest imbalance.
How should Indian investors view investing in non-dollar assets?
It’s a question of what time horizon you have in mind. If you are looking at a 10-year time horizon, I think there would be a case for non-dollar currencies or assets.
If you are taking a short-term view, I wouldn’t advise anybody to (bet against the dollar). In the last one week, we have seen the dollar appreciating.