There is a debate among American economists on whether a strong US dollar serves the country better or a weak one for now. The argument has arisen due to the failure of the American administration to persuade China to raise the exchange rate of its currency so that US trade deficit with China becomes far less than the large one it is.

The Chinese are willing to adjust the exchange rate marginally and not raise it substantially. So the advocates of the weak dollar argue it is better to opt for a weak dollar and export more and wipe out the large deficit with not only China but the rest of the world.

But the advocates of the strong dollar argue that the strength of the dollar is a reflection of US economic power and it should not be weakened as a matter of policy. Instead other means should be sought to balance the trade with the rest of the world, particularly China.

But the countries of the world who are disappointed by the 30 per cent drop in the value of the dollar against the euro in a short period do not really want the dollar to go down in their own self interest. They have large dollar holdings as part of their foreign exchange reserve. China for example holds over $1200 billion , Hong Kong’s reserve runs in to several hundred billion dollars. India’s foreign exchange reserve is over $200 billion. And Pakistan’s reserve is over $16 billion.

Most of these holdings are in dollars from which there has been a marginal shift following the fall in the exchange rate of the dollar, particularly in relation to the stronger euro. The countries with a large foreign reserve feel happier in depositing their reserve in the currency of one country that is relatively strong and resourceful.

Japan which came up with its strong yen then went down. And yen has been oscillating. The yen is good for marginal deposits now and not mainline deposits. So the world has a vested interest in a strong dollar until it finds another reserve currency.

The Opec countries are not happy with the falling dollar so they keep on increasing the price of oil so that as the dollar goes down, they get more price for the oil which is priced in dollars.

While America has been pressing China to raise the exchange rates of its currency, India has done that and brought down the dollar from around Rs42 to a dollar to Rs39 a dollar. Initially it has hurt its exports but the low price of Indian goods and the aggressive Indian salesmanship will makeup for that soon. So India has been setting up higher and higher export targets.

In Pakistan, there has been a demand for raising the exchange rate of the rupee so that imports can become cheaper. But that will hurt the exports which are already critically low and face too many obstacles because of intense competition.

Yet another reason the countries of the world do not want their currency to become stronger against the dollar in spite of its fall is that it will hurt their exports which they cannot afford. A devalued currency also results in larger imports at cheaper prices as is the case in respect of India. Many countries in the world want more of exports rather than more of imports. So they do not want to devalue their currencies in relation to the dollar even while the dollar is falling. So in spite of the drop in the value of the dollar, there are too many external factors going in favour of the dollar. Yet another reason why there has been little of formal devaluation of the currencies of countries is though the currencies are linked to the dollar, they have been set afloat and their exchange rate changes day after day. This flexible rate is of a great advantage to every country without the need for frequent devaluation of currencies.

When Pakistan had a fixed exchange rate in 1973, we devalued the rupee from Rs4.75 a dollar to Rs11 and then came up to Rs10.

After that we tried a basket of currencies on the basis of which the exchange rate was fixed on a daily basis. When A. G. N. Kazi, was the SBP Governor, he used to fix the rupee exchange rate on the basis of a basket of currencies but in fact on the basis of the latest dollar rate in the world.

After that we came up with the current floating rate which does not change much day after day while this is a more satisfactory arrangement than the drama of devaluation frequently witnessed and subject to intense speculation. Luckily for us there has been no violent fluctuation in the rate during this period.

The exchange rate of the rupee depends on a number of factors including the exchange rate of the dollar around the world. It depends on inflation and export prices and the demand for Pakistani goods abroad and the ready availability of those supplies. These factors have not been very favourable to Pakistan. So there has been a creeping devaluation .

The high cost of imports as a result of the high exchange is one of the major causes of inflation in Pakistan and that is called the imported inflation. The Indians enjoy the benefit of a stronger rupee by getting their imports at Rs39 a dollar while we pay nearly Rs61 a dollar. This factor is usually ignored when we talk of prices in India and Pakistan.

The cost of production , transportation and exports have tovs be kept low to maintain reasonable export prices and keep the prices competitive. If high inflation prevails, the export prices will rise and the exchange rate of the rupee may slip further.

So inflation affects not only the poor people while it makes the rich richer but also affects exports critically. Hence the exports have risen only by four per cent in the new financial year while we need a far higher rate of growth.