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The steady erosion of the value of the dollar against the world’s major currencies is a reflection of the direction in which the world economy is moving. The falling dollar seems to be the prelude to the end of
US hegemony. The rising economies in Asia and the increasing economic clout of China and
India, combined with the Japanese economy, put American economic clout to a severe test.

A Brazilian supermodel, on an assignment in the
US recently, allegedly refused to be paid in dollars and insisted on euros. This appropriately highlights the dollar’s plunging value and its potential consequences. Thus, where economists fail, a model’s decision conveys a lot.

The dollar has dropped against all 16 of the most actively traded currencies this year. It has lost 10 per cent against the euro, 6.9 per cent against the pound and 5.2 per cent against the yen. It reached its lowest value vis-à-vis the Canadian dollar since 1950, when the fixed exchange rate ended, and hit a 23-year low against the Australian dollar. The US dollar has weakened 8 per cent against a basket of currencies from major trading partners since January 2006.

In several capitals, especially in the Middle East, where the US has acrimonious relations with some, the weakening of the dollar is news for rejoicing. For example, the US standoff in Iran over the latter’s nuclear program makes Iran to ally with another oil producing country, Venezuela, to project the dollar’s fall, as a prelude to the end of US dominance in the world.

Venezuela President Hugo Chavez paid a visit to his Iranian counterpart, Mahmoud Ahmadinejad, in a show of the strength of their friendship, bound by opposition to
Washington. Though the firebrand duo did not succeed in pushing OPEC away from trading in the slumping greenback during the OPEC summit in Riyadh, because of opposition from the host Saudi Arabia, it did demonstrate the potential for stirring up problems for the
US and its allies in the future.

As the dollar weakens, oil prices have reached a record high of $100 a barrel. If US President Bush does not refrain from a military strike on
Iran over the nuclear issue, the prices of oil could double to $200, thereby plunging the world economy in disarray. Following the fall of the dollar and the success of the euro, the Latin America nations are also considering a common currency.

During the OPEC summit in Riyadh last week, both Iran and Venezuela proposed that OPEC begins pricing its oil in a basket of currencies, rather than just the dollar, and wanted the summit to specifically express concern over the dollars slide in its final statement.

Though Saudi Arabia, an US ally, blocked the initiative by Iran and Venezuela, the very fact that finance ministers of the OPEC nations have been asked to study the issue of the falling dollar is itself significant.

The sizable US current account deficit and five years of record trade deficits also put considerable downward pressure on the dollar. But US officials are not worried about the shrinking currency. In fact, they are quite pleased. A falling dollar means U S products and services are more competitive in, global markets and, indeed, that is the case.

However, European manufacturers complain loudly about US attempts to devalue their way into renewed competitiveness. Dollar is the world’s reserve currency and the readiness to hold dollars is a vote of confidence in the stability of the currency.

There is fear that those investors, who worry about risking huge losses by holding dollars that will one day be devalued, will start divesting their dollar holdings, an act that could .be both an act of economic war and a self-fulfilling prophecy. The recent Chinese suggestion that the country should diversify its reserves rattled markets.

The truism, however, is that there are no alternative safe havens in the world economy at present as the euro is not yet such an option. The US should manage its own economy better and contribute to global economic stability.