Is current dollar devaluation a blessing in disguise?

08:15, October 15, 2009      

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Some analysts say history proves currency devaluation is effective in fighting global slumps while others argue the current dollar's dive may turn out otherwise in the latest recession.

The dollar has slumped to a 14-month low against a basket of six other major currencies, helping push up gold and oil prices to multi-month highs.

It was deja vu back between 1930 and 1934, in the Great Depression, when Australia led major economies in leaving the gold standard and devaluing their currencies, resulting in economic recovery, in some cases rapid.

Devaluation back then was as high as 41 percent.

Now a better gauge is the U.S. dollar index, which fell to a 14-month low of 75.44 during Wednesday's trading.

The index is a measure of the greenback's value against the euro, Japanese yen, pound sterling, Canadian dollar, Swedish krona and Swiss franc.

The baseline of 100.00 on the index was set at its launch in March 1973 and, since then, the index has climbed as high as the 160s and fallen as low as the 70s.

The current dollar devaluation has pushed up gold to record levels, reminiscent of the 1930s tandem movement of currency and gold price.

While some take the current devaluation as auguring well for the embryonic economic recovery now appearing in parts of the world, others fear the intentional move by the U.S. Federal Reserve may nip the recovery in the bud outside of the United States.

The euro, having subsumed 12 European currencies to account for57.6 percent of the currency units per U.S. dollar, hit a 13-monthhigh to remove options barriers at 1.4850 U.S. dollars in a session marked by increasingly bearish sentiment.

Continued dollar devaluation, however, will inevitably force investors to purchase and stock gold and oil to force up the prices of these two commodities, which are bought and sold in dollars.

An increased oil price will in turn hamper resource-dependent economies trying to kick off or speed up their recoveries.

Crude oil futures, used by some investors as an inflation guide, have risen to seven-week highs, with the price having jumped 66 percent this year alone.

Crude oil for November delivery has gained 88 cents to settle at 74.15 dollars a barrel on the New York Mercantile Exchange. Oil prices have risen for four straight days and a barrel costs 4 percent more than it did one week ago.

"There's lots of concern about the weakness in the dollar," said Peter Fertig, the owner of Quantitative Commodity Research Ltd. in Germany.

The price moves have led the Organization of the Petroleum Exporting Countries to forecast that any recovery will be "slow and weak."

Source: Xinhua
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