The FINANCIAL — Appreciation of the single European currency against the US-Dollar has been happening on the global market for the whole of 2009. As of this week, one USD would buy only EUR 0.68, down from 0.80 in March and a peak of 1.21 in 2000.
The greenback slid against other major currencies as well. Meanwhile in Georgia the USD has not reduced against the GEL. Experts say that Georgians should not worry about the shrinking USD, as it seems unlikely to swiftly fluctuate in value. More over experts says that the slump of US greenback against other currencies will help states to overcome the recession. As the shrinking volume of USD will stimulate sales and will even manage to attract Europeans.
“Recently the US Dollar has depreciated significantly. This supported the idea that the world’s main reserve currency is not a safe haven any more. Doubts have strengthened by the fact that US debt has increased drastically with the huge stimulus plans. But as the recession is bottoming out and the first signs of recovery of the US economy are already visible (the declining home price has stopped and in some regions prices have gone up; also consumer confidence is rebounding), investors should not worry that much about their USD investments. Of course, the choice still depends on the individual’s risk appetite,” Archil Jacobashvili, Associated Professor of Georgian-American University (GAU), told The FINANCIAL.
“In the opinion of many international analysts, the USD seems to be undervalued and their expectations are warrantable about the upgrade of the USD. The key of such impetus lies in the FED, when the increase of the target rate will be started. December 2009, at the latest March 2010, should be the deadline for the start of increasing rates,” Jacobashvili says.
Jacobashvili says that the National Bank of Georgia (NBG) has minimized its interventions in the FX Market by introducing auctions. “What the central bank is currently doing, is just responding to the demand from commercial banks and recently only the selling auctions have been holding. That is why the price of USD has not reduced. As for the EUR, this exchange rate is moving in a more volatile fashion, as the GEL Price per EUR is a cross-rate determined by the EUR-USD exchange rate on the market,” he explains.
Jacobashvili expects that the USD/GEL will be pending in the range of 1.65 – 1.70 over the next few months, even the National Bank of Georgia is getting rid of FX-Reserves (USD 1.6 B) under management and the additional injections are also expected from the IMF, World Bank and other bilateral international donors.
“This volume of reserves should help the recovery of the real sector of the domestic economy, getting more export oriented, with better infrastructure for the attractions of capital inflows,” he says.
“Recently we heard a statement in the UN that as the USD was a worldwide currency it affected the whole world. Financial problems in the USA influenced the national currency of America and this directly affected the whole world. Experts came to the conclusion that the whole world being connected to one concrete currency is not correct,” says Akaki Tavadze, Teacher of the Management programme of ESM Free University.
Tavadze mentions that besides the global recession the result of the depreciation of the US greenback is that the USA is facing a serious budget deficit. “The States did not manage to solve its political problems in Iraq and Afghanistan. Military expenses are harming the USA a great deal. On top of this, the sum of USD 750 billion, which was launched for the rescue of financial institutions, turned out to be non-effective. We heard the bad news about the bankruptcy of three banks just yesterday.”
“Actually the devaluation of the USD is convenient for the American economy,” Tavadze notes. “Import in the USA is becoming profitable. Even Europeans have started buying goods in the US. To overcome the recession customers should start spending money and thus the slumped dollar will encourage sales; thereby Americans will soon restore their positions on the global market.”
“The strengthening of the EUR is connected to the higher yield expectations of European Capital Assets (Time Deposits, Bonds, Stocks), especially for mid & long terms, which is additionally captured by the difference of the official rates between the USA (FED’ Funds O/N Target: 0,25) and the EUR-Zone (ECB’ 1 Week Refinance Rate: 1,00). The institutional investors, namely from Asian countries are trying to switch the currency exposures of their portfolios and so by increasing the demand, the EUR is becoming more expensive,” Jacobashvili says.
Tavadze believes that frequent fluctuation of a currency harms the attraction of investors and also individuals.
“The GEL has been keeping stable for a long time but its past several instances of fluctuation have encouraged distrust in people. The last period of fluctuation of the GEL which took place last year sharply shortened the number of deposits in the national currency. Customers still keep reserves in USD. Recently there was a big demand for EUR but it is still not as stable as the USD, as we have seen several fluctuations of it recently where it has sharply risen and then slumped again. The most important factor for depositors is the stability of currencies. They think that the US dollar can stand the time and so still regard it the most stable currency,” Tavadze notes.
Jacobashvili mentions that there are foreign investors free in their competency for the choice of currency in Georgia. Anyway, they may convert transactions in to EUR, when they see the risks within USD denominated investments.
“Also, the GEL could be considered an investment opportunity. On the Georgian side, the offering of the lower Tax, of less bureaucracy, but also the competitive rate expectations are crucial points, when the capital holders are making the decisions. Not only Georgia, but also a couple of other developing countries are fighting for the “hearth” of the investors, particularly at this time, when the USA and Europe are temporarily less attractive and the new locations are much sought after since the recession,” Jacobashvili says.
“From a purely economic perspective, the appreciation of the GEL would make imports easier and the current market conditions works for exporters. Also, those people who invest in our domestic currency can benefit from the strengthening of the GEL as the proceeds converted into foreign currency will be greater than in the case of a weak GEL,” he says.
“The USD permeates markets around the world and accordingly its replacement with another currency will take a lot of time. It is a very difficult process. Saving money in USD will not be dangerous in the future, even if it experiences fluctuation,” Tavadze says.
Tavadze notes that currently the US are facing more serious problems than China. “This county was less affected by the recession. Even after the beginning of the crisis the Monetary Fund borrowed USD from China, as the latter had lots of reserves of USD. Chinese started saving gold, silver and other valuable metals and made big reserves from it. So after the beginning of the global recession they have had the chance to use these saved metals.”
Written By Madona Gasanova
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