KARACHI, April 10: The rupee is maintaining its strength against the dollar as currency dealers begin to focus on the woes of US economy, not drawing any comfort from the Pentagon’s approaching victory in Iraq.

As the US troops advanced into the centre of Baghdad on Wednesday, the dollar retreated against the euro in the London exchange market and was two cents weaker from its strongest level since the war started. The euro continues to make steady gains against the rupee in the local market.

The forecasts that the dollar will gain strength in case of a brief war, at least in the short-term, is belied by the current currency price movements as the US seems to be near military victory.

Similar is the case with oil price forecasts. Instead of jumping to $40 or more per barrel, oil prices have dropped by 10 per cent since the US troops invaded Iraq, having a positive impact on Pakistan’s balance of payments. Earlier, the policymakers had reckoned that oil prices would shoot up, inflating the oil bill by one billion dollars. This has not happened.

No doubt, the shipping freight to the Gulf ports has increased, and is expected to be withdrawn as soon as the war is over. Trade with Iraq has never been significant. Even the investment conference to attract Arab money, scheduled later this month, has not been postponed.

The stockpiling of dollars, soaring home remittances and growing foreign trade is keeping the external sector robust and the rupee stable.

As in the case of the rupee, the strength of two currencies — the dollar and the euro — is being determined by the trade and current account balances. The eurozone is running trade surplus of $96 billion and a current account surplus of $54 billion. The US has been hit from trade deficit of $496 billion and the current account deficit of $503 billion.

The Iraq war, budgeted at $80 billion, is likely to widen the current account deficit, though cheap oil imports may have a positive impact. The US needs a weaker dollar to contain the trade imbalances. An uncertain economic recovery and falling interest rates tend to cut yields on dollar investments and the demand for the greenback.

The European Union’s foreign trade is at $4,400 billion (2001 figure) against America’s $1,900 billion. The US imports total about $1,200 billion against exports of about $750 billion. Currently, the euro is the anchor currency for trading within the EU. The eurozone will be expanded by inclusion of ten more countries in 2004. And the share of euro in the global reserves of the central banks is increasing by 5 per cent annually. The dollar is under threat from the euro.

The US-led globalization has taken a hit from the Iraq war, at least for the short-term, and from the East Asian crisis in 1997.

Besides, the expanded EU market would be less dependent on the US market facing uncertain recovery, and help the Europe come out of the current economic slowdown much sooner.

As in Europe, East Asia’s regional trade is picking up fast. In the first 10 months of 2002, exports to China accounted for 56 per cent of East Asia’s export growth. China has played a critical role in off-setting the vulnerability of economies that depended on sales to the US, the EU and Japan. It has emerged as the engine of growth for the region with industrialized Japan taking a back seat.

While shifting some of their foreign exchange reserves to the euro from the dollar, quite a few of East Asian nations are toying with the idea of making Chinese yuan a regional currency. Asia is also increasing its domestic demand by consumer financing and developing housing markets.

With the two prosperous regions, the Europe and East Asia looking inwards as much as outwards, the future of US economy as the powerhouse for the global economic growth and the dollar as the anchor of world trade is unpredictable.

Similarly, though not as significantly as in the case of Europe and East Asia, the Iraqi Arab and Muslim nationalism will spur regional trade and economic cooperation. It is also evident in Pakistan’s case. Whereas a few European and American banks ceased their operations, the Arabs continue to invest in the financial sector. They are also expanding their presence in petroleum business.

For sometime now, the Gulf states have also been looking at the option of floating their own currency. The Iraq war may hasten the process or they may gradually switch over to the euro from the dollar.

As the present trend indicates that national economies are integrating into regional markets faster than embracing the concept of “one economic unit” globalization served by a single international currency.

The US diplomacy met its worst failure when Washington failed to get the United Nations on board for a war against Iraq.

The war may create more problems than it may resolve. Iraq’s external debt is estimated at $116.5 billion. The major creditors include France and Russia with claims of $8 billion each.