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Strong dollar, a stronger America

What happens if American politics gets uglier and the US slides into a civil war and its economy goes belly-up, as many cassandras are suggesting it could?

On a visit to Washington DC last week for the annual spring meeting of the World Bank and IMF, India's Finance Minister Nirmala Sitharaman, responding to a question about the Indian rupee falling against the US dollar, said "I will not look at it as rupee sliding, I would look at it as dollar strengthening."

Social media smackdown was swift. Snarky memes and putdowns ranged from gibes like "We did not lose the match, the opposition team won" to "The ship is not sinking; water level is ascending inside the ship." Among the harshest taunts was, "We are not hungry; other countries are eating more" - a reference to India's worsening position (107th) in the global hunger index.

Sitharaman was not entirely wrong though. Her subsequent explanation that the Indian rupee has performed much better than many other currencies -- an authentic claim -- against the incessantly strengthening dollar was lost in transmission because the first comment was easier to turn into memes and mocking headlines. The moment spoke to the dangers of guileless communication in the age of social media, which is ever ready to turn an innocuous word or sentence into a scathing meme.

Indeed, the Indian rupee has fared relatively well against the dollar compared to many other currencies. The greenback’s value in recent months has jumped nearly 20 per cent according to the US Dollar Index, which measures the currency against a basket of major trading partners, including the British pound, Euro, Japanese yen, Canadian dollar, Swiss franc etc. The pound, which once brought in four dollars at a time the sun never set on the British empire, and fetched two dollars more recently, came almost on par earlier this month at $1.03. The Japanese yen has lost 22 per cent, the Korean won 18 per cent, and the Turkish lira a stunning 28 per cent. Currencies of countries from Malaysia to South Africa have suffered. Even the mighty Chinese Yuan has slid to a two-year low against the -- for now -- mightier dollar.

Many developing nations are worse off, with currencies of countries such as Sri Lanka and Pakistan getting crushed, the situation aggravated by domestic crises. Compared to some of these countries, India's rupee slide of around 10 percent is relatively modest. Although it hurts the entire country with hikes in prices of everything from fuel to food because of the consequent rise in import bill and inflation, which the poor bear stoically, it bites India's chattering classes as well. Hence the stinging attack on Sitharaman.

The immediate reason for the strong dollar is the US Federal Reserve's sharp hike in interest rates in order to combat inflation at home. This is attracting money from all over the world – because the US and its currency are seen as safe, stable, and secure. This in turn further strengthens the dollar. While the strong US dollar makes imports into the US cheaper and buffers US inflation to an extent, it hurts countries that import from the US and uses the US dollar for their imports because the dollar is the denominated currency for global transactions. Does the US care? Nyet. Its foremost concern is tamping down inflation at home, preferably -- for the Biden administration -- before the midterm election in November. Rest of the world and its worries can wait.

Beyond all this, but tied to US politics and the election, is the issue of the dollar's status as the world's reserve currency. Even countries that do not import significantly from the US are hurting because the US dollar is the de facto currency for global trade and financial transactions. It is used for purchase of everything from fuel to food, two most prominent items in the import list of most countries and to conduct international financial transactions, eliminating the costs of settling deals involving different currencies.

The dollar's unique status and primacy rests on the perception of America being a stable, reliable bedrock of global politics and business. What happens if American politics gets uglier and the US slides into a civil war and its economy goes belly-up, as many cassandras are suggesting it could? Obviously, the world would have to transition to a new currency if global trading chaos – that would ensue if it began transacting in multiple currencies – is to be averted. The natural dollar replacement candidate would be the Chinese yuan, currency of the world's second largest economy, on track to be the largest.

The last time the world transitioned its reserve currency from the British pound to the American dollar some 80 years ago, the transition was relatively seamless because the US and UK were allies on the same side. That is not the case with the US and China. There is not an iota of chance that Washington will cede the primacy of the dollar to the yuan. But to fend off the challenge from the yuan, the US will have to continue to project the image of a strong, stable, open, transparent nation governed by rule of law – commitments that have underpinned the primacy of the US dollar. So there is so much beyond abortion, guns, and immigration at stake in the upcoming US election and acceptance of the legitimacy of its results. Global financial stability is at play. - The writer is a senior journalist based in Washington