The dollar, which has been under pressure in the global foreign exchange markets recently, fell to a 14-month low against the euro. Over the past six months, the American currency has depreciated in trade-weighted terms by as much as 11.5 per cent in relation to currencies such as the yen, the euro, as well as the Canadian, New Zealand, and Australian dollars. The weakening dollar has made exports from the U.S. more competitive. By the same token, exports from countries whose currencies have strengthened are losing their edge in the all-important American market. While global imbalances are being corrected, a precipitous fall in the exports of other countries will certainly not be good news for the global economy that is slowly coming out of the recession. The U.S. economy continues to suffer from structural deficiencies. For instance, its level of external debt is very high and the fiscal deficit is almost 13.5 per cent of its GDP. However, partly aided by the currency depreciation, the U.S. has made impressive strides in trimming its current account deficit to nearly a half of what it was at the start of the financial crisis. On the domestic front, the falling dollar has become a political issue, with the Obama administration coming under pressure to intervene and stem its fall. That would involve, among others, pushing up the interest rates, a course of action unlikely to be accepted as it will imperil recovery in the U.S., and given also the broad agreement among leading countries to keep the stimulus measures in place for some more time.

The decline in the dollar has revived the debate over its role as the world’s principal currency. It is the currency of choice in trade transactions and the undisputed benchmark in currency trading around the world. This is not the first time that a terminal decline of the dollar has been predicted. Yet no real alternative has emerged as a safe haven currency. At present, 65 per cent of the world’s reserves are in dollars and 25 per cent in euro. There would be some shift over the next few years, but the dollar’s supremacy is unlikely to be challenged for a long time to come. Even its current fall is viewed by Paul Krugman and others as a symbol of success of the measures to revive the world economies including the U.S. economy, not as a sign of weakness. Simply stated, at the height of the crisis, investors flocked to the dollar, the traditional refuge currency. The dollar is merely climbing down from the inflated values to which it was pushed up. In India, the sharp appreciation of the rupee caused also by the surging portfolio inflows is posing major policy challenges.

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