Is Fall of the Dollar Good News?

THE value of the US dollar is continuing to decrease. Thus the price of gold, oil and grains is rapidly rising. The value of the US dollar rose 20% from July of last year to March of this year. However, the factors that had been weighing down the dollar have started to appear again and the value of the dollar has now fallen even more greatly than it has risen during the crisis.

On top of this, it is being forecasted that inflation pressure will increase, thereby causing the US dollar to drop in value even more. Despite being the key currency since World War II, Some experts claim the US dollar is now lying on a ‘death bed’. Some nations, such as China and France, are presenting the problems regarding the key currency because of the fall of the US dollar.

However, most international currency experts insist that there is no currency that could substitute the US dollar as the key currency. Some say the Euro or Yuan could become the key currency, however, it is prevalent that they cannot substitute the US dollar. The Chinese Yuan is controlled by the government, meaning it is impossible for it to become the key currency unless the financial market there is opening up and developed.

The only competitor of the US dollar would be the Euro, however, it is still far too early. The US dollar takes up 65% of the World’s foreign exchange reserves while the Euro only accounts for 25%. Euro reserves will eventually increase, but since the Euro is also in the midst of uncertainty, it is asserted that it will be difficult for it to replace the US dollar as the key currency. The euro zone is suffering from deficit and debt just like the United States.

Most experts predict that a collapse of the US dollar is impossible, but it will still continue to fall. The U.S. is expected to maintain its interest rate at a near record low for a while, meaning that the US dollar will continue to fall. This is why the US dollar has been achieving record lows recently.

As of October 13, the exchange rate of the US dollar to the Euro rose to $1.4875 per Euro, causing the US dollar to drop to its lowest value since August of last year. The dollar index to the currency basket of the major 6 countries fell, scoring at 75.81. The weak dollar tendency is causing the price of international goods to rise. The weak dollar tendency also stimulates dollar possessing countries to possess more spot goods, stimulating their prices even more.

The most prominent examples are gold and oil. The reason why their prices have risen rapidly recently is because of the weak dollar. A weak dollar causes the gold price to continue recording highs. On October 13, the price of gold rose to $7.50, closing at $1,064.20 at New York Mercantile Exchange. While the rise in the price of gold can be traced to a weak dollar due to the low interest rate, a more serious problem is that the weak dollar is stimulating dollar possessing countries. The same applies for oil as well.

China is a good example of this problem. China purchased 454 tons of gold between 2003 and 2009. As a result, it now possesses the 6th largest amount of gold in the world, following the U.S., Germany, the IMF, Italy and France. However, the ratio of gold among China’s foreign reserves is only 1.9%. Experts forecast that the price of gold will continue to rise because China is trying to buy even more gold to avoid a drop in value of its foreign reserves due to the weak dollar. One raw material investment expert forecasts that the price of gold will rise higher than $2,312, its record high in 1980, reflecting inflation adjustment, while others are predicting that the gold price will go higher than $5,000. However, others believe the gold price will go through adjustment because the price rise was caused by the addition of speculation forces.

Crude oil futures price is also rising due to the dollar’s fall. At the NYSE, the price of Western-Texan crude oil for November rose to $74.10 on October 13, near the year-high of $75. OPEC’s forecast of an increase in demand for oil next year also contributed to the rise in price. OPEC forecasts that demand for crude oil will reach 84,930,000 barrels, an increase of 70,000 barrels a day, due to recovery of the world’s economy. This is an increase of 200,000 barrels from what was forecasted last September.

A rise in oil price will have a huge influence on the Korean economy as well as it can greatly influence the current account and prices. Korean economy research institutions forecast that the price of oil will be anywhere between $75 - $85 per barrel (Western-Texan oil standard) next year due to the weak US dollar. The price of oil rose by 60% this year alone, and it will continue to rise next year, slowing down the economic recovery.

M o s t nations are focusing on stockpiling crude oil, reflecting the unstable international oil prices market, and this is also influencing the market. China, which is focusing on securing resources, plans to procure as much as 270,000,000 barrels of crude oil by 2011, completing its second strategic oil reserve plan. China has devised a strategic plan to store enough oil to last 90 days (import oil standards) within the next 15 years, and has been pushing the strategic oil reserve plan since 2003. According to the plan, China has completed construction of the reserve base which can store up to 103,000,000 barrels and has now moved onto the second phase. When the second phase is complete, China will have a reserve facility capable of storing 270,000,000 barrels of oil, with plans for a third phase expected to bring this total to 500,000,000 barrels.

The United States and Japan are also increasing their oil reserve facilities. The U.S. decided to expand its strategic oil reserve to 1,000,000,000 barrels in August of 2005 and is now working on this. Japan is not only reserving crude oil but also LPG and is speeding up with the Joint International Reserving Business which Korea first introduced. The Joint International Reserving Business involves renting domestic empty reserve facilities to oil-producing countries and companies, in return for which the country gets the option to purchase the oil first.

The weak dollar is not only causing gold and oil prices to rise, but also of the price of white gold, silver and grains. The price of white gold continued to rise and hit $1,352.80 per ounce on October 13. The price of silver rose slightly, hitting $17.84. Grains futures price has also been on the rise. Future prices for wheat, corn, and beans rose on the Chicago Mercantile Exchange (CME). Meanwhile, the prices of coffee, cocoa beans and sugar are also rising.

The weak dollar is not only heating the world’s raw material market but is also stirring up the dollar carry trade which stimulates investment in high profit products. This trade, which involves borrowing dollars at a low interest rate and investing them in high profit products, is flourishing. On top of this, even reflation investment, which involves a pre-emptive investment forecasting global inflation, is flourishing.

Experts analyze this tendency is stimulating rises in the goods market, real estate market and capital market prices. Overseas currency holding countries, including China, threaten the world’s resources market by procuring more overseas resources with their dollars. China in particular has started to actively develop resources in West Africa’s Ghana and in the Republic of Guinea, one of Africa’s poorest nations. Such resource procuring among nations is predicted to get even fiercer in the future.