Forecasting exchange rates is a dicey business. As Alan Greenspan, the former US Fed boss, once said, the activity "has a success rate no better than that of forecasting the outcome of a coin toss." Yet, it is increasingly becoming evident that the greenback's future may be in shambles, though, perhaps not in the immediate term.
The dollar index, a measure of the value of the US dollar relative to majority of its significant trading partners, has halved since mid 1985 with nearly 35 percent of the erosion seen since the turn of the century. In the meanwhile, the euro is catching up.
The European currency has risen 77 percent between autumn 2000 to date. But it's not just the value: the euro seems to be gaining traction in the foreign exchange reserves holdings of many central banks across the globe. It hasn't just grabbed about 7 percent share of its rival, the USD, in the last decade of its existence but has also eaten a small share of the Japanese Yen as well.
Although, the four factors influencing the choice of a reserve currency -- share of world output and trade, macroeconomic stability, degree of financial market development, and network externalities are still skewed to the benefit of the dollar - increasing global concerns hint the tide will change eventually.
The world has seen a series of dollar-spanking news in the last fortnight. Among them included, the UN's call for new reserves currency to end dollar 'privilege' and World Bank President's statement that America should not take the dollar's status for granted because other options are emerging.
These statements came amid reports by Middle East watcher Robert Fisk, that money managers of Gulf Arab are secretly hatching a plan with their Chinese, Russian, Japanese and French counterparts to end dollar dealings for oil. Though, officially denied, the reports have sent shivers across the currency markets - just like Iran's plans to convert its reserves into euros did two years back.
Reserve currencies don't last forever. International currencies of the past -- including the Chinese Liang and Greek drachma, coined in the fifth century B.C., the silver punch-marked coins of fourth century India, the Roman denari, the Byzantine solidus and Islamic dinar of the middle-ages, the Venetian ducato of the Renaissance, the seventeenth century Dutch guilder and of course, sterling - all lost one way or the other.
And now with demands for more say in global institutions by BRIC and other emerging powers amid changing dynamic of international political economy - it's the dollar. So what should Pakistan do? For a major ally (non-Nato) of the US, surviving on IMF's feeding tubes with relatively insignificant amount of reserves, calls to shed some greenbacks from its kitty may be too early. Yet the policy wonks in Islamabad and at the central bank must starting thinking for tomorrow, today.
With the emerging options of IMF's SDR, the euro and also the Chinese renminbi in a more distant future - its time for Pakistan to ponder for slight shifts in currency composition. A symbolic tilt towards the euro - since the EU is Pakistan's second biggest trading partner after the US - followed by SDR holdings, perhaps isn't too much to ask.
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