A BRIEF HISTORY OF THE WORLD WARS
The first world war was fought between the Allies powers(Britain,France ,Russia,USA) and central powers(Germany,Austria-Hungary and Ottoman Turkey).It began in August 1914 and in 1918 the war got over. The war transformed the US from being an international debtor(it was a debtor because market forces led to sharp depreciation of the currencies of the major U.S. trading partners) to an international creditor as Britain borrowed a large number of sums from US banks.
Even its economy grew because the Henry Ford assembly line method promoted faster and cheaper ways for producing vehicles. It led to mass consumption(so the supply increased prices was more affordable) and the economy grew. In the year 1923, the US became the largest overseas lender. But in 1929, due to the great depression the economy was disrupted, unemployment increased,poverty increased.In the year 1929 and 1932, about 110000 companies collapsed.By the year 1933 about 4000 banks closed.
The second world war fought between Axis powers(Japan,Italy,Nazi Germany) and the Allies(Britain,France ,Russia,USA).It started in the year in the year 1939 and ended in the year 1945. After the second world war the US emerged as the dominant economic,political and military power. It was decided to hold dollars as a medium of exchange and it was changeable to gold at the rate of $35 per ounce.Earlier the system of fixed rate change to a floating rate change as the US dollar no longer commanded confidence as the world’s principal currency.
Also, Central banks frequently hold currency in the form of government bonds, such as the U.S. Treasuries. The U.S. The Treasury market remains by far the world’s largest and the easiest to buy into and sell out of,the bond market( the buying and selling of various debt instruments supplied by a variety of institutions). The U.S. dollar held reserve currency made more than than 60 percent of global foreign exchange reserves.
It’s also seen that the dollar is the strongest currency and it holds its value and power as compared to the other countries.
In accordance with India, at the time of independence the value of one dollar was equivalent to a rupee. But currently one dollar is equivalent to 82.28 rupees.
HOW IT HAPPENED?
At the time of independence the Indian economy was devastated . For improving its economy, including with the adoption of the five-year plan in 1951, the Indian government borrowed money from foreign or private sector. In the 1960s.
Foreign imports increased in high magnitude.Also, in the year 1957, the Indian currency was decimalized(s the conversion of a system of currency and measures to units related by powers of 10).The Indian government was facing a budget deficit( expenses exceed revenue and can indicate the financial health of a country) and thus was not in a state to borrow extra money due to a negative rate of savings. The situation got worse by the Indo-China war in 1962, the Indo-Pakistan war in 1965, and the drought that took place in 1965-1966. The Prime Minister took a decision to devalue the rupee to 1 USD = 7.50 INR by 1967. The devaluation made exports cheaper and imports expensive which resulted in inflation.Futheron, In the year in 1974 rupee value decreased to 8.10 in 1974 as a consequence of the oil blow in 1973.
In the 1991 economic crisis,The foreign reserve had shut up to a point that India scarcely had the money for three week’s worth of imports. India had to borrow money from the International Monetary Fund (IMF) against its gold reserves.
The exchange rate hurtled throughout the 1980s, the rate was 1 USD = 17.32 INR.By 2002, the rupee had fallen to Rs 48.99.In the year 2016, it further devalued to 68.77 rupees due to demonitization. During the pandemic i.e it further depreciated to 76.67.
WHAT CAUSES VALUE OF DOLLAR TO RISE?
There are a number of factors that cause the U.S. dollar to rise.When the demand for the dollar increases then its value increases whereas when the demand decreases then its value decreases.
There is an increase in the demand when international associations like foreign central banks or foreign financial organisations demand more dollars.Its demand is high as it is the world’s reserve currency. The different factors that influence the value of the dollar to another currency include inflation rates, trade deficits, and political stability.
The US exports products and the different services that basically creates a demand for dollars as the consumer needs to pay in the terms of dollars. Thus, the consumer will convert their currency into dollars by selling their own currency to buy dollars in order to make payment.
Also, the U.S. government issues bonds(it’s an agreement from an investor to a borrower) for raising capital, that is purchased by the investor, payment will made in dollars.The U.S. dollar is considered a safe shelter during times of global economic unpredictability, so the demand for dollars can often continue despite movements in the performance of the U.S. economy.
The floating of the dollar began in 1973. The U.S. budget deficit was the main cause of the dollar appreciation between 1980 and early 1985. The high budget deficit forced the U.S. Government to play against the private sector for accessible savings, raising interest rates in the United States.
Since the year of 2000 it was seen that the dollar’s appreciation was at an all time high, appreciating 22 percent against the yen, 13 percent against the Euro and 6 percent against emerging market currencies.
In the 2008 financial crisis,because of the safe haven flow the dollar strengthened as the government bonds were well in France, Germany, Japan, the Netherlands, Switzerland and the United Kingdom, there was appeal of Treasury bills that kept global investors from presenting a general withdrawal from US securities. To the extent that global investors sold other currencies against the dollar to take refuge in Treasuries.
In the year 2015, the U.S. dollar rose nearly 12 percent over the currencies of the nation’s major global exchange. It was seen that for foreign buyers, the local-currency price of a U.S. product was more expensive.During the year 2016, the U.S. dollar turned as the economies of other major trading currencies improved.
In the year 2020, due to the coronavirus pandemic, the dollar depreciated by 6.7%in 2020.
WHAT CAUSES DEPRECIATION OF DOLLAR
Different factors contribute to depreciating the U.S. dollar. These include monetary policy, rising prices or inflation, demand for currency,economic growth , and export prices.
The central bank of the country executes the monetary policy either to increase or decrease the interest rates. For example, if the central bank lowers interest rates and it is referred as easing.Easing occurs when central banks reduce interest rates,motivating investors to borrow money. Those borrowed dollars get spent by consumers and businesses and restore the U.S. economy.
But easing weakens the dollar and hence can lead to depreciation. As the U.S. dollar is a fiat currency(declared legal by a government but has no r fixed value and is not backed by any tangible asset, such as gold or silver.)
Inflation leads to a depreciation of currency as higher inflation depreciates currency. As,when inflation is high,the cost rises hence goods become more expensive.Also, Goods from a nation with high inflation are less competitive compared to a country with lower inflation.It leads to a fall in demand and hence the value of a currency depreciates.
It’s seen when there is demand for a currency the currency stays strong and maintains its power. One of the methods a currency remains in demand is if the country exports products that other countries want to buy and demands payment in its own currency. As the US does not export more than its import this is how it creates a demand high for global demand for US dollars.
Also US is referred to as reserve currency and reserve currencies are used by nations across the world to purchase desired commodities, such as oil and gold. When sellers of these commodities demand payment in the reserve currency, an artificial demand for that currency is created, keeping it stronger than it might otherwise have been.
When prices for a key export product fall,there is a possibility of the currency to depreciate. For example loonie(Canadian dollar) depreciates when oil prices drop because oil is a major export product for Canada.
WHY DOLLAR IS GETTING STRONG?
The US dollar is appreciating to a famous high. The ICE Dollar index raced from 93.24 in September 2021 to 109.64 on September 20. It basically measures US dollar value opposed to the basket of currencies of its biggest trading partners rising more than 14 percent in 2022 to observe the highest rally since its institution in 1985 and this rise in the dollar is powered by the hawkish tone of the US Federal Reserve at the Jackson hole conference. It resulted in the fall of the Euro, Japanese Yen, and British Pound have fallen to multi-decade lows opposed to the US dollar. Even Chinese Yuan got hit in the milieu.
In the next Federal Open Market Committee (FOMC) meeting(it’s a branch that decides the monetary policy of the US), the US central bank is expected to increase policy rates by 75 basis points, causing other central banks to follow suit. The US is expected to be benefitted when the dollar goes up. The strong dollar will reduce import bills of US, reducing input costs for their industries.With inflation decisions close to double digit in major economies, the rising slash of policy rates will continue during the current year and early part of next year before a stop.
559It is observed that when the dollar appreciates, it might result in the depreciation of the domestic currencies in varying degrees and lead to multiple exchange rate management risks, more prominently to the emerging market economies (EMEs) .The dollar’s role as the primary currency used in global trade and finance means its variation have huge impact. It results in bettering in EMEs. Even the forex reserves of EMEs also deplete when their central bank forces US dollars to balance the exchange rate. Also,repayment of dollar termed debt will have to be appreciated with higher fund allocations whenever they are developed for repayments. . Depreciation of currency might impact the budget and lead to a wider fiscal deficit than planned.In the larger interest, strengthening dollar value to mitigate risks to countries that are linked with US dollar.