The Greece Effect: Some Changes In The World Currency Orders

The debt crisis ensuing in Greece seems to be impacting currencies and prices of commodities like oil in a big way. Not only has it dashed the hopes of the Euro to emerge as an alternative reserve currency to the US dollar, but has actually propped up the latter due to emerging risk and investors seeking shelter in the safe haven of the US dollar.

The problems plaguing the Euro are not limited only to the Greek crisis, but debt problems in the nations of Portugal, Spain and Italy are adding to Euro woes as well. Similar debt issues had led to a decline in the US dollar from mid 2002 to 2008, with US budget and current account deficits having bloated to unmanageable proportions. It was during this period that the Euro had gained importance as an alternative to the US dollar and made major gains in its value. However, with the recent debt problems unfolding in the Euro zone, the Euro seems to have been hit by a double whammy resulting in it losing some of its sheen. While, the Euro zone debt crisis has hit the Euro directly, the economic uncertainty in the Euro zone is leading investors to take cover under the safety of the US dollar. This has propped up the US dollar and has hit the Euro indirectly.

Once there were signs of the recession easing off, the US dollar lost some of its value it had gained as the safe haven currency after 2009. However, the Euro zone crisis has propped up the US dollar once again due to its safe haven status. The Euro's loss of strength brings in other sticky problems for the Euro zone economy. A weaker Euro along with oil prices having firmed up in dollar terms, implies that Euro zone's oil imports have become more expensive and with that come in the prospects of inflation. However, a weaker Euro is helping prop up exports and Germany is experiencing a robust demand for its exports. Recently, China piped Germany to become the largest exporter in the world. The Euro, which has depreciated nearly 17% compared to the Chinese Renminbi, is now helping Germany catch with its lost position. From these dynamics, it appears that troubles in some nations of the Euro zone are helping other nations in the Euro zone. Thus, while nations like Greece are f! acing a debt crisis, which is weakening the Euro, the weaker Euro is helping Germany boost its economy.

While, the Euro and the US dollar battle it out for supremacy as a global currency, the recession followed by the Greek and Euro zone crisis has brought into limelight other currencies that could someday gain predominance. The Indian central bank, the Reserve Bank of India has undertaken a study, which suggests that the Chinese Renminbi and the Indian rupee are gradually gaining currency as possible alternative currencies due to the inherent strengths of the two economies. While, the Indian central bank has asked the Indian government to carefully evaluate the possibility of floating the rupee as an alternative currency, it has also stated that the US dollar is likely to continue as the main reserve currency in the foreseeable future. The Indian rupee as of now is not fully convertible though market fluctuations reflect in its changing exchange rate unlike the Chinese Renminbi, whose rate has been fixed by the government. However, eventually, the Indian rupee will also becom! e fully convertible. All said and done, the recent economic recession and the current Euro zone crisis are certain to bring about some changes in the world currency orders.