Rarely does a day pass by without a new reason to be depressed about the dollar. Most of the countries leverage their currency reserves to finance international trade in US dollars to protect themselves against financial speculators. The US plays a vital role in world trade, particularly in oil, which is denominated in dollars. And this has created a large diversified demand for dollars. However, the use of the US dollar as an international reserve currency has been declining gradually. The rise of euro as an alternative international reserve currency and the current account deficit in the US have accelerated the value of the dollar to decline.
The greenback's unrelenting downslide to a new low of $1.46 in December 2007 against the euro is inviting deriding remarks from America's detractors, unnerving investors and creating problem to policy-makers. The most recent being the contemplation of Organization of Petroleum Exporting Countries (OPEC) to decouple its links with the greenback, distancing the foreign exchange markets of a reliable consumer of the troubled currency.
Crude
oil prices which remained on average $20 a barrel during
the 1990s have increased spectacularly to $57 a barrel
in 2005 (from approximately $31 in 2003) and to $66
in 2006. This year, the crude oil prices have further
climbed to over $85 a barrel in October reaching $90
at the beginning of November. Soaring oil prices, fixed
exchange rate systems and the declining dollar are combining
to distort the economies of the members of the OPEC
who pegged their currencies to the dollar which inturn
generated inflation. The immediate challenge for them
is the inflationary effects of the oil price looming
large on their economies because of the close association
with the weakening currency. Inflation, which was barely
above 3% in the Gulf region until 2003, is now hovering
around 10%. |
