A strong dollar is rarely kind, often resulting in higher inflation and interest rates with the eventual rise in the cost of living. This is obvious, and is what has been happening in the past few months. The issue is not how to tame the dollar, but how to live with it – how to contain its effects on our economies. There is no satisfactory way to deal with a resurgent US economy, of which the media has of late been flush with news and analyses of the runaway depreciation of the regional and international currencies against the dollar. For good or ill, the world is beholden to the green back. It has been this way for the past 70 years, with the US currency shepherding the financial and monetary system in much of the world. The Economist in a recent issue reminds us that about 60 percent of the world’s output, and a similar share of the planet’s people, lie within a de facto dollar zone, in which currencies are pegged to the dollar or move in some sympathy with it. In recent months, it notes, the prospect of even a tiny rate rise in America has sucked capital from emerging markets, battering currencies and share prices. Decisions of the US Federal Reserve (Central Bank) affect offshore dollar debts and deposits worth about $9 trillion. Because some countries link their currencies to the dollar, their central banks must react to the Fed. Those who have been in Rwanda know that the Franc has not been spared, as the currency has steadily declined. And, as a sobering regional analysis of the situation in the EAC observes, “Kenya, Tanzania and Uganda have used more than $1.2 billion, so far, from their foreign currency reserves since the start of the year to cushion their falling currencies against the dollar.” In November last year, as integration has continued to take hold, EAC member states agreed that each country should always have enough dollars to buy 4.5 months’ worth of imports. But it has been difficult to sustain, though only Kenya has so far fallen below this limit at 3.94 months in its bid to prop up its currency. While limit is well above the IMF requirement, it illustrates not only the dire local situation, but perhaps the dearth of the global dollar problem. Of this problem, The Economist cogently puts it this way: A system in which the Fed dispenses and the world convulses is unstable. Ideally, as it observes, America would share the burden with other currencies. Yet if the hegemony of the dollar is unstable, its would-be successors are unsuitable. The euro is a currency whose very existence cannot be taken for granted. Only when the euro area has agreed on a full banking union and joint bond issuance will those doubts be fully laid to rest. As for the yuan, The Economist says almost derisively, China has created the monetary equivalent of an eight-lane motorway—a vast network of currency swaps with foreign central banks—but there is no one on it. Until China opens its financial markets, the yuan will be only a bit-player. Be that as it may, another worry is that most emerging market currencies are suffering as investors move their money from emerging countries’ financial markets back into developed countries such as the US. This is a complaint one keeps on hearing about regionally and across the world. And, as Kenya’s Central Bank Governor was quoted saying in a recent interview, “it’s inevitable that the US Fed will raise the rates. At the beginning, the bets were that the rates would rise in September, but the China economy meltdown did influence the Fed’s position. We hope that they will be more sensitive in their rate decision to dynamics outside their financial markets.” It seems there’s nothing we can do about it. GituraM@yahoo.com
