US Dollar unlikely to appreciate in future - Leading Economist

by Hiran H. Senewiratne

The US dollar will not appreciate as a hard currency in the future with the value depreciation due to the recession in the US economy, a leading economist, Dr. Harward Nicholas said.

"There is a recession in the global economy. It resulted in US economy to plunge into a crisis situation, which is looming very large with its debt mounting," Nicholas said at a forum titled 'Global economic outlook and the demise of the dollar' organised by the Reuters.

He said the US economy is concerned about a negative domestic saving. This situation has resulted in the accumulation of the debt component ratio which caused the creating of asset bubbles in the US economy especially in the housing sector.

He said it has increase foreign ownership of US debt that attributed vulnerability in the US currency market due to this situation. This has reflected the increase of bank interest rates.

Due to that banking sector lending towards housing sector and most of the people use houses as collateral. He also said business entities borrow money from banks keeping house prices as collateral.

Nicholas said the causes for this situation are due to the long business cycle, political intervention in other countries by the US Government and high borrowings. Therefore it had helped the Japanese yen, Euro and Chinese Yuan to become hard currencies in the international community, he said.

He said huge deficit in the US economy under the Bush administration is adding insult to injury.

The crisis and recession or stagnation in the economy will arise bankruptcy of industries, fall in property prices, financial disturbance and rise in unemployment. This situation will adversely affect the US dollar in the long run, he said. Further the US economy is going downward and its budget deficit is three and half per cent of the GDP. With the high interest rates credits have become worse in the USA.

Due to these reasons Chinese economy is growing rapidly which would appreciate the Chinese currency due to the over production of the industrial sector, Dr Nicholas said.

Holding of dollar assets is a danger at this time and the danger looms due to the sagging economic scenario in the country. He said most of Latin American countries have dolarised their economies and 50 per cent of their internal transactions are done in US dollar terms. It is said that dolarisation will effect only 3 per cent growth in the economy and certain economies have under performed.

Dr. Nicholas said Euro and Yen currencies are printed heavily in the European Union and Japan. High volume of printing of currency notes will cause inflationary situation. 'Therefore a lot of people buy gold as an insurance policy. But holding gold as resources has a high probability of losing 20 per cent of the value in the long term given the current situation', he said.