Business Daily (Nairobi)
Sam Makinda
23 October 2009
opinion
One of the most unpredictable factors in international transactions in the past few years has been the strength of the US dollar.
Is the strong American dollar good or bad for the Kenyan economy?
Any credible economist would tell us it is neither good nor bad for the economy as a whole.
Some sectors of the economy benefit from a strong currency, but many others do badly.
For example, most importers, including manufacturers and retail traders, gain when the dollar is weak or the shilling is strong in relation to other currencies.
Most parents sending their children to start abroad pray that the shilling remains strong as it is now in relation to the US dollar.
However, many exporters, including hotel owners and tourist operators, are likely to receive diminishing returns as the dollar weakens or the shilling appreciates.
My local currency, the Australian dollar, has appreciated considerably in relation to the American dollar, pound, euro and yen.
For instance, it has moved from 65 cents to 92 cents American within two months.
The Australian central bank added fuel into the rising Aussie dollar when it increased the cash rate by 0.25 per cent two weeks ago, thereby becoming the first among the G20 economies to put up interest rates since the global financial crisis started.
As most Australian universities rely on foreign students, including a large number from Kenya, to make up for shortfalls in their budgets, they are likely to suffer in the coming months as the strong Aussie dollar renders university education in the US, UK and other countries more competitive.
Despite the pain a weak US dollar might cause in some parts of the world, I believe it is necessary and inevitable.
It is necessary because without it, the US economy will not recover quickly.
There is no more fiscal and monetary stimulus available to jumpstart the economy.
The decline of the US dollar has been inevitable because various countries have been diversifying foreign exchange reserves away from US dollars.
Central banks in both developed and developing countries have been rebalancing their reserves portfolios by increasing the percentage held in euros, yen, Australian dollars and gold.
This rebalancing has so far has been confined to incremental reserves in the countries that have current account surpluses.
Many of them have not found it necessary to sell large quantities of US dollars.
In recent months there has been talk of an alternative to the US dollar as the world's reserve currency, but there is no viable alternative at this stage apart from the euro, which is rising inexorably, but it has other problems.
It is expected that at some point in this long and bumpy decline of the US dollar, it will start to put upward pressure on US bond yields, which would quickly put the US economy and share market into reverse.
It will be a long time before America's share market is robust enough to withstand significant increases in mortgage rates, so the trick that the US has to pull off is depreciating the currency to help manufacturers and export industries, and therefore jobs.
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