The falling dollar

Today the US dollar fell past the 1.40-to-the-euro barrier, for the first time ever. It also fell below the 40-rupees-to-the-dollar mark for the first time in 9 years.

Predictably, the Indian media will be focussing more on the second point than on the first. Every article these days — such as this one — talks about the “rising rupee”. But while the rupee has risen sharply against the dollar this year, it has risen much less sharply against the euro (and has been mostly falling since late May). The same is true of other currencies.

So my questions are:

  • Why the obsession with the dollar? If the rupee rose against a basket of currencies one could call it strong. Today, it is the dollar that is weak, against every currency. So why are people like the above writer asking the RBI to intervene? How can the RBI affect global currency rates?
  • And why is a strong rupee (or a strong euro) a problem? Exporters say it hurts their competitiveness. But it also allows (some of) them cheaper imports.
  • If the government decides that the strong rupee is bad, why can’t the government just print more rupees and buy dollars with them? Only three things could happen: (1) The rupee falls against the dollar, so you achieve your goal and earn some dollars in the bargain (of course, you would also cause the rupee to fall against other currencies); (2) The rupee stays steady with the dollar, so you’ve earned some dollars for free; (3) The dollar continues to fall — but it would have fallen even faster without your intervention. Your dollar purchases lose value, but it’s ok because you didn’t actually spend real money on them.

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1 Comment

  1. The CAD was higher than USD today. Say goodbye to Hollywood.//Makes me want to cry like a little girl.

    Reply

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