Decline in Dollar
Reports emanating from the global financial circles on Wednesday September 9, 2009 revealed that the value of the US dollar had fallen against the currencies of its major economic partners. The significant decline in the value of the US dollar was not seen since the financial crisis reached dangerous proportions last year. Indications are that the decline in the value of the dollar, for the slowly stabilizing US economy, was spurred by a change in the attitude of investors towards the dollar. Just a year ago many investors were frightened by the demise of several prominent financial businesses, Lehman Brothers and AIG included. Their collective fear produced a reaction that precipitated a credit crunch and the potential collapse of the global financial system. Amidst the uncertainty, investors decided to hold on to their money. Cash was king as investors lost confidence in the value of most tangible assets. The US dollar was seen as a safe bet even though the financial crisis had much to do with what was happening in the US economy.
Disagreements
The preference for cash kept the US dollar, still the safest currency around, trading at a competitive level against key rival currencies. Recently, however, the US dollar has suffered a setback against the Euro and other currencies, including the Swiss Franc. This development is happening as the meeting of the G-20 approaches and disagreements exist among member countries of the next steps needed to manage the slowly subsiding global economic crisis. Foreign currency experts cite the willingness of investors to take increased risk and the continued low yield on US assets as reasons the demand for the dollar is weak.
Switch Resources
The willingness of investors to switch resources to gold and other commodities might have also been triggered by doubts about the ability of the US to control its deficit. Even though inflation is not currently a threat, some investors appear sufficiently worried that inflation would soon become a problem. This technical evidence, however, might not contain all the drivers of downward pressure on the US dollar. Important global players like China and Russia have been clamouring for the dollar to be replaced as the world’s reserve currency. Their cries for remaking the global financial system have been joined by the United Nations Conference on Trade and Development (UNCTAD) which has also expressed the view that dependence on the US dollar played a big part in the financial crisis. As a major multilateral agency, UNCTAD has expanded the dialogue on the global monetary system to the rest of the international community. China and Russia now have other partners outside of the G-20 with whom they can jointly pursue their cause.
Good and Bad Times
The change in the dollars’ fortune could mean good and bad times for a country like Guyana. A decline in the value of the dollar usually means that investors are turning away from the dollar. One tendency of scared investors is to hold their money in gold. This usually means that the price of gold would rise in response to higher demand for the precious metal. The price of gold traded this week close to US$1,010 raising prospects for the price to reach or even surpass the historic US$1,033 mark that it reached in March 2008.
Production
Higher gold prices more than likely mean higher export revenues for Guyana from this commodity. The challenge that Guyana faces though is keeping gold production and exports up. This is a legitimate source of concern for the country since first quarter results of gold production were not impressive. According to the Bank of Guyana, output of gold fell by nearly 2 percent in the first three months of the year when compared to the first quarter of last year. First quarter output has not exhibited this kind of behaviour since 2006 when the industry lost significant production capacity. Typically, the production of gold increases as the year progresses. Last year, as in previous years, gold production increased an average of 7 percent every quarter. There is no reason for miners to slow production down this year, especially with gold selling at such high prices on the world market.
Automatic Reaction
But the falling dollar also induces an automatic reaction in oil prices that is usually unfavourable to Guyana. Since the price of oil is denominated in US dollars, oil traders automatically jack up the price to compensate for the loss in the value of the dollar. Oil prices fell as low as US$30 per barrel by the end of 2008 and remained depressed for the first part of 2009. Consequently, Guyana saw a 55 percent decline in its import bill for fuel and lubricants between the third and fourth quarters last year. That downward trend reflected itself in the first quarter of 2009 leading the Bank of Guyana to report a decline in the current account deficit in the balance of trade.
That favourable situation is under threat from a source that Guyana cannot control. The source is the US dollar. From December 2008 to September 2009, the price of oil has increased nearly 140 percent. A further decline in the value of the dollar would only make the situation worst for Guyana. The price of oil would continue to rise and could easily reach critical proportions again.
Even if the price of gold and that of oil remain at current levels, Guyana would still suffer an increase in the opportunity cost of oil. Guyana would have to put out about 12 percent more of its receipt from gold to meet its fuel import bill at current oil prices. This is quite different from the first quarter when there were some hopeful signs. Admittedly, this bit of economic misfortune has nothing to do with mal-administration on Guyana’s part.
