Reasons for a worldwide dollar crisis
The US dollar is the most potent currency in the world today and is the world's leading reserve currency. About 90 per cent of the world's total economic transactions are conducted through US dollars. According to estimates, there is currently around 1.8 trillion US dollars worth of paper and metal currency circulating worldwide. The US dollar is almost essential for international trade.
The situation in the world has been turbulent since the beginning of the Corona pandemic that has been going on for more than two years due to the Russia-Ukraine war. The price of fuel is increasing in the international market, and the price of daily commodities is going out of hand. Due to the sudden increase in import costs, the foreign exchange reserves of various countries have been strained. Bangladesh is no exception.
The central bank of any country keeps such reserves to meet import costs, deal with the country's financial disaster, prevent the depreciation of the local currency, strengthen the monetary policy, implement the budget, provide money for large projects, and ensure the payment of foreign debts.
Recent data show that foreign exchange reserves are depleting in various countries. Statistics show that China currently has the largest foreign exchange reserves in the world. In June 2022, the country's reserves were US$ 3.24 trillion dollars. However, China's reserves have fallen significantly compared to last year's.
The current reserves of Russia are US$ 565.30 billion, and last year it was $592.40 billion. The United States, the world's largest economy, has a current foreign exchange reserve of $234.43 billion. The dollar reserve in the United States has increased significantly this year.
The same applies to the rest of the top ten countries. Among them Japan currently has the second highest reserves. It has a reserve of $1. 31 trillion. The country's reserves were $1.38 trillion in July last year.
India has the world's fourth largest foreign exchange reserves and the highest in South Asia. As of July 15 this year, their foreign exchange reserve was $572.71 billion. And last year it was $615 billion.
Bangladesh is second only to India regarding foreign exchange reserves in South Asia. Last June, the country's reserves were $41.82 billion; however, it decreased in July. Sri Lanka, which declared bankruptcy at the end of June this year, had foreign exchange reserves of $1.86 billion, including a $15 million currency swap with China.
Since investors always seek the highest profits that are predictable or "safe", especially from abroad, they increase investment to create a strong capital account and consequently create a high demand for dollars. On the other hand, import costs which are the result of the import of goods and services from other countries in which dollars go out of the country, i.e., if imports are more significant than exports, there will be a current account deficit, thereby increasing the pressure on the foreign currency or the dollar, creating a crisis.
The US dollar is the foundation of the world economy and a reserve currency for international trade and finance. Like other fiat currencies, the dollar's relative value depends on economic activity and the outlook for the United States.
Exporting goods or services in dollar creates demand because consumers pay in dollar. So they have to sell their currency and convert it into dollar to make payments.
Additionally, when the US government or large American corporations issue bonds to raise capital that foreign investors purchase, those payments must also be made in dollar. This also applies to purchases of US corporate stocks from non-US investors, requiring the foreign investors to sell their currency to buy dollar to buy those stocks.
These examples show how the US creates more demand for dollar and thereby puts pressure on the supply of dollar, increasing the dollar value relative to the currency sold to buy dollar and creating a crisis in the sector.
After all, the US dollar is considered a great security during times of global economic uncertainty, so demand for the dollar can often persist despite fluctuations in the performance of the US economy. For example, in cases where the US economy weakens and rising unemployment reduces purchasing power, i.e., faces the possibility of a sell-off, bonds or stocks can be sold to return to their local currency. The dollar is affected when foreign investors buy back or buy their local currency.
The business people are primarily responsible for measuring whether the supply of dollar will be greater or lesser than the demand for dollars. To determine this, we need to pay attention to any news or events that may affect the dollar's value. These include releasing government statistics, such as reserves, payroll, GDP, and other economic data that can help us determine whether the economy has strengths or weaknesses.
There are several reasons for the increase in the US dollar value, but the primary factor is the demand for dollars. As the demand for the dollar increases, so does its value. Conversely, if the market falls, so does value. Demand for dollar increases when international parties, such as foreign nationals, foreign central banks, or foreign financial institutions demand more dollars. Demand for the dollar is generally high because it is the world's reserve currency. Other factors that affect whether the dollar appreciates against other currencies include inflation rates, trade deficits, and political stability.
Factors affecting exchange rates between currencies include currency reserve status, inflation, political stability, interest rates, trade deficit/surplus, and public debt. A weak currency is one whose value declines relative to other currencies. A weak currency can indicate economic and social fragility in many cases. A weak currency can arise from high levels of inequality, political instability, government debt and trade deficits.
Finally, experts are currently talking about various reasons behind the global dollar crisis, such as the import-export deficit, the war between Russia and Ukraine, increase in military spending by the United States and allied countries, including Europe, decrease in remittance flow, economic and commercial blockade imposed by the United States on various countries including Russia, increase in fuel oil prices and reduced supply, corruption in developing countries and money laundering abroad, hoarding of extra dollars by traders hoping to make extraordinary profits, etc.
Dr Matiur Rahman is a researcher and development worker.