Logo of Phnom Penh Post newspaper Phnom Penh Post - ‘The US dollar is our currency, but it is your problem’



‘The US dollar is our currency, but it is your problem’

Content image - Phnom Penh Post
Market forces will determine the value of the dollar. Exchange rate adjustments in the market reflect variations in the economic performance of each country and facilitate efficient adjustments in the global economy. AFP

‘The US dollar is our currency, but it is your problem’

Joe Biden was inaugurated as the 46th president of the US on January 20. However, two rumours accompanied his steps to the White House.

First, his finance minister, Janet Yellen, has emphasised her commitment not to interfere with the US dollar. She prefers to allow the market to determine the value of the currency.

Yellen’s statement has given rise to various interpretations. It could be an initial signal that Biden’s economic policies will tend to be pro-market, based on the interaction of supply and demand.

Market forces will determine the value of the dollar. Exchange rate adjustments in the market reflect variations in the economic performance of each country and facilitate efficient adjustments in the global economy.

Yellen, a former Federal Reserve chief, has probably already anticipated the second rumour. The commencement of vaccination in the US raises optimism about a faster-than-expected economic recovery in the second half of this year. This has triggered discourse about the US central bank gradually reducing its bond-buying programme to sustain the nation’s economic recovery.

The two policies above, if they are really implemented, will undoubtedly shake the global market. The first-round impact will work directly on the commodity markets. Import-export activities with the US will fluctuate following fluctuations in the exchange rate of the domestic currency against the US dollar.

The import-export activities among countries that use the US dollar as the basis of payment will also be affected. Again, the volume of trade will fluctuate in accordance with the dynamics of the US dollar. If the dollar strengthens, exporters will suffer and importers will benefit.

This profit-loss situation also triggered a trade war between China and the US during the Trump administration. Trump tackled the deficit in the US trade balance with China by increasing import duties. In essence, Trump wanted to prove the accusation that China was deliberately weakening the yuan to achieve a surplus.

The second-round impact will operate on global financial markets. The US central bank, sooner or later, will rebalance its balance sheet. The high ownership of government bonds to finance the Covid-19 pandemic will be gradually reduced by selling them on the global market.

US government bonds are seen as a risk-free asset and are therefore attractive to global market players. The dollar, which has been invested in emerging markets, will move quickly towards the US. The phenomenon of the dollar “coming home” is a necessity with all its negative effects.

The adverse effect is most complicated when the owners of the fund play in both markets. The owners of the fund remove their money from the commodity market to the financial market. Conversely, funds in financial markets will migrate when commodity markets promise higher yields.

The thesis above seems close to reality. It is not a coincidence that the global financial crisis that hit financial markets in 2008 occurred amid the commodity boom. The rise of global financial markets from the crisis appears to have accelerated the end of the commodity boom era.

How about Indonesia? If both Biden’s economic policy scenarios prove correct, Indonesia will face flight of foreign capital which in the short term will depreciate rupiah. Imports of raw materials, equipment and machinery will shrink, which will further affect production capacity.

However, if the US real sector quickly recovers and grows, Indonesia can seize export opportunities and offset the pressure on the rupiah’s depreciation. Also, Indonesian products can fill the role of Chinese products that are subject to high tariffs. Indonesia’s non-oil and gas export share to the US ranks second after China.

In another scenario, Chinese products that should be destined for the US will be transferred to other countries, including Indonesia. Indonesia’s imports from China rank the highest. As a consequence, the trade deficit with China will be enlarged, which may not be covered by an increase in the trade surplus from the US.

Within the above logic flow, strengthening trade between countries in the same region has the potential to be increased, through ASEAN for example. The agreement on the use of local currency is the basis for economic growth and regional stabilisation without too much dependence on the US dollar.

Furthermore, the diversification of export destination countries deserves attention. The expansion of the export market deserves to be directed outside the traditional countries that have existed so far. North Africa, the Middle East, Eastern Europe and Latin America are wide open to become potential markets for Indonesian products.

In a broader scope, if Indonesia remains willing to play in the international market, increasing competitiveness is non-negotiable. The increase in exports should not only be triggered by the weakening of the domestic currency, but must be also supported by the intrinsic superiority of its export products.

Strengthening the domestic market appears to be the safest solution to various sources of external turmoil. Domestic consumers must be protected so that their purchasing power remains strong and they are able to absorb domestic production, instead of consuming more expensive imported products.

The four options above unfortunately are difficult to realise anytime soon. Perhaps the 61st US treasury secretary, John Connally, was right when he said: “The dollar is our currency, but it is your problem.”

Haryo Kuncoro is a professor of economics at the State University of Jakarta School of Economics and a research director at the Socio-Economic and Educational Business Institute, Jakarta

THE JAKARTA POST/ASIA NEWS NETWORK

MOST VIEWED

  • Municipal hall releases map detailing colour coded Covid risks by commune

    Phnom Penh municipal governor Khuong Sreng released an official map detailing the red, yellow and dark yellow zones within the city under the new lockdown orders for Phnom Penh announced on April 26. The designation of red, dark yellow and yellow corresponds to areas with high,

  • Inter-provincial travel ban lifted; Phnom Penh and Takmao not exempted

    The government on April 25 decided to lift the inter-provincial travel ban and the closure of tourist attractions across the country, effectively immediately. The travel ban and closures of all resorts were imposed on April 6 and 17 respectively in a bid to curb the spread of Covid-19,

  • Phnom Penh unveils rules for post-lockdown transition

    The Phnom Penh Municipal Administration issued a set of detailed guidelines for the seven days to May 12 after the capital emerges from lockdown at the onset of May 6. In the 14-page document signed by municipal governor Khuong Sreng released on the evening of May 5, the

  • Phnom Penh, Takmao lockdown extended for another week

    The government late on April 26 announced an extension of lockdown in Phnom Penh and adjacent Takmao town in Kandal province for another seven days – or longer if residents do not comply with Covid-19 preventive measures and the community outbreak does not subside – until May 5. According

  • Gov't mulls extension of Phnom Penh, Takmao lockdown

    The Inter-ministerial National Commission for the Control and Enforcement of Lockdown held a video conference meeting on April 25 to review a draft document on the extension of lockdown in Phnom Penh and adjacent Kandal province’s Takmao town. The meeting was chaired by Minister of

  • Gov’t issues guidelines as lockdown nears end

    The government has issued a five-page set of instructions to be enforced when the three-week lockdown of Phnom Penh and adjacent Takmao town in Kandal province ends on May 6. According to an announcement signed by Prime Minister Hun Sen on May 4, the instructions cover a