September 30, 2002	Monday	Rajab 22, 1423

THE US dollar has weakened. The euro is getting stronger. And the rupee has gained against the greenback and depreciated against the euro. Are the current trends determining the parities between the three currencies temporary or of a long term nature?

First, the future of the rupee depends on how exports perform, how long lasting are the soaring home remittances and when would imports of industrial raw materials and machinery pick up significantly to impact on import volumes. Exports can not bring windfalls but improvements could mean additional few hundred million dollars. In the current global and domestic environment, a substantial rise in investment is not round the corner.

The sources of remittances are yet to be identified to predict accurately, whether the increase is on account of the reversal of flight of capital or the inflow of workers’ incomes or a combination of both and in what proportion. The durability of these inflows has yet to be fully assessed. For the short-term, the strength of the rupee will be determined by improved exports, soaring remittances, unprecedented foreign exchange reserves,debt relief by the Paris Club and liberal assistance by the World Bank and the Asian Development Bank. But there is an emerging global trend towards capital outflows from the United States towards states and regions whose nationals do not find the alien lands safe heaven for their money.The war against terror is accelerating that process though volumes are too low to impact significantly on the US economy. The investment opportunities for these funds, sent by individuals, for the present, are also very limited.

Many Asian nations and individuals are now debating whether euro could serve as substitute for the dollar. The gradual weakening of the greeback and sharp rise of the euro is throwing up the question, though perhaps prematurely, as to the future of the greenback as the anchor of world trade.

The dollar is too deeply entrenched to be so soon dislodged from its dominant position specially when the Europe like the USA, is facing an economic slump. Yet the global politics and world economy are moving in a direction that tends to undermine the dominant position of the greenback and America’s hegemonic ambitions.

Washington’s unipolar authority is being challenged by Europe’s multilaterialism supported by Arabs, Russia and China. Politically isolated, super power politics is running into rough waters.

The Iraq issue would be an acid test whether unipolar authority or multilateralism would govern the world. The outcome will impact on the US economy as well as the dollar.

If the European Union, a product of multilateralism, emerges the winner, multilateralism would bring EU and the Middle East closer, to yield economic gains for the euro-zone that may strengthen euro. Europe and the Arabs share a common view that action against Iraq should be the prerogative of the United Nations. Multilateralism in politics may tend to shake up one-currency anchor of world trade.

The unilateral approach of the United States betrays the lack of leadership in building a consensus. And global security house Morgan Stanley says “The US leadership in the global economy and the world markets was coming to an end.”

The IMF chief economist Kenneth Rogoff believes that euro which has risen quite sharply against the US dollar, would continue to appreciate and curb foreign sales. The president of the Bundesbank does not agree. He says that euro has been undervalued and perhaps it is still undervalued despite the nine per cent appreciation against the greenback this year. He adds that the European industry has not lost its competitive edge because of a stronger euro. He is right. The shrinking of the domestic German market has to some extent, been compensated by increased foreign sales.

About 50 per cent of the EU exports is within the euro-zone. For this internal EU trade, euro is the anchor currency. As national economies integrate further and the trade volumes within the EU region increase, the euro would become stronger. Contiguous national territories translate into lower transportation costs and facilitate trade.

Before the dollar began its downward journey, it was over-valued by 30 per cent. As an anchor currency for world trade and a store of value, it suited Washington to keep the greenback strong.

Come 9/11 and the recession, the US policy makers are not averse to gradual fall of the dollar to boost exports and contain soaring current account deficits. American trade deficit during 12 months ending July 2002 was $438 billion . The overall current account deficit rose to five per cent of the GDP in the second quarter. Foreign direct investment (FDI) that took care of current account deficits dropped by 60 per cent during 2001. The improvement in Pakistan’s external sector and the global depreciation of the dollar has strengthened the rupee against the greenback. Against the peak of an eroding rupee at 64.07 to a dollar, the parity is now at Rs59.14.

Currency experts say that the rupee is still under-valued. Were the State Bank not to intervene, the rupee would be priced in the range of 55-50 to a dollar.

The stronger the rupee, add these experts, the more confidence it inspires. It means increased level of remittances.Besides, exporters are induced to bring earnings faster. There is a better return on the rupee.

As the euro becomes stronger, the Pakistani goods exported to Europe become cheaper and competitive.

Exports to euro-zone exceed sales to the United States and are also growing faster. In last fiscal, sales to eur-zone amounted to $2.5 billion against $2.25 billion for the United States. As the EU has allowed greater access for Pakistani textiles after September 11 than the United States, exports to euro-zone are most likely to improve further.

Barring Latin America, a backyard of the United States,the current trend of economic growth and private capital indicates that the developing states and the emerging markets are performing much better than the industrial economies hit by recession.

The latest IMF forecast for growth rate for EU is 0.9 per cent. The US growth rate has been scaled down to 2.2 per cent because of slower recovery and may turn out to be slower than the forecast. In both the USA and the EU, direct foreign investment has plummeted by 60 per cent.

9/11 and economic slump has initiated dispersal of global capital that tended to concentrate in Europe and America. The FDI into Africa had nearly doubled from $9 billion in 2000 to $17 billion. The growth rate for Africa as a whole in 2001 was 3.7 per cent and is expected to be respectable for 2002.

The outlook for Asian nations, according to the IMF’s last week’s forecast, was bright with a growth rate for emerging markets, (that includes South Korea, Indonesia. Thailand, Malaysia. China and Hong Kong), estimated at 5.9 per cent for 2002. China and Korea topped , poised to grow at 7.5 per cent and 6.3 per cent. India’s growth is estimated at 5 per cent and Pakistan’s at 4.6 per cent.

Latin America has been hit by recessions, with the economy of Argentina contracting twice as quickly as the United States did in the Great Depression of 1930s.Latin America’s economic recovery is deeply linked with that of the United States. In the given scenario, the currencies of emerging markets, with improved economic performance, should tend to stabilize.