Dollar's Getting Dull-er: Now, What About Rupee?

The US Dollar and its might in the world are in danger of disappearing for good. You must also have seen articles and social media posts saying the end of USD is near. Is it true, or is it a full-fledged rumour to create panic in the market? After all, a currency's value plays a huge role in the investing world.

We all dream of visiting foreign locations for a memorable vacation at least once in our lifetime, I know I do.🤩  But the one thing that’s stopping us from doing so (apart from non-existing savings) is the huge difference between Indian Rupee & other currencies. We are well aware that different countries use different currencies to purchase and sell things. So, the exchange rate of currencies plays a huge role here, using which people mark the exact value of a commodity. And when the talk of currencies comes, we can’t exactly ignore the superpower of the US Dollar.

The United States of America is known as the most powerful and influential country in the world. This statement is a fact well-proven for many decades now, and it’s not only because the USA has a rich history. The one factor that gives the USA so much power over the entire world is the US Dollar (aka USD).

Since 1944, USD has been dominant since its selection as the key reserve currency at Bretton Woods, New Hampshire. The dismaying difficulties the world suffered after World War II and the power of gold gave the US Dollar the position of king in all currencies. Today, about 85% of the world’s trade is accomplished using the USD as the base value.

So, popular for being the global currency unit, why are there whispers about the US Dollar soon losing its top position? Why do experts in the economic field predict that USD is soon going to be replaced by another currency, Yuan? Are all these questions a predicament of the forthcoming future, or is this just a baseless myth?

We are going to unravel this all in the article ahead. So, let me take you on the journey of the US Dollar losing its dominance as we know it!

How did the US Dollar Become The Global Currency?

A war that changed the complete parameter of the world, from the economy to the participants' global status and even the geography. Yes, I am talking about the World War, especially WWII. This war played a huge role in giving the USA & its currency a royal standing among all currencies. Despite being one of the main participants in WWII, the United States of America was one of the few countries that didn’t suffer much, either in capital or infrastructure.
I mean, it is a wonder that one of the active war participants didn’t suffer much damage except for its fleet suffering. America sure is something else, isn’t it?

Due to this, other countries turned towards the USA for assistance to rebuild their economies. Many were doing this literally from scratch; take Japan, for instance. After the damage the country's major cities, Hiroshima & Nagasaki, suffered due to the atomic bombardment from the main character of our article today (USA), it’s a wonder they were able to cope with this soon.

The value that served as the backdrop for all currencies before WWII was the gold price. As per the price of the gold, countries used to value their currencies. Then in 1944, the Bretton Woods system of monetary management established certain rules to handle the financial and economic aspects between the USA, Canada, Europe, Australia, Japan and many other nations. Here, it was decided to choose the US Dollar as the chief currency for the exchange rate because of the large gold reserve America had.
Yes, one of the main reasons behind the USA’s might as a capitalist country is due to the nation having the largest gold supply in the world. Apparently, America boasts a gold reserve of over 8,000 metric tons, which is double and triple the amount of Germany and Italy, respectively.

By offering financial support to other countries suffering from the devastating effects of the war, America succeded in replacing gold as the basket currency value. It means that now, nations across the world started using USD to value their currencies instead of doing so with gold. This is known as the floating currency value. Got my point? No? Well then! Let me simplify it further for you. No one currency can have a value on its own.

Every currency is valued against another currency to estimate its value for the demography a person stands in. As the value of USD differs in India and the United Kingdom, so any item, say a box of chocolates belonging to the same brand, would be priced differently in UK & India.

If USD is the floating currency value, then one might wonder which currency is used to measure the US dollar’s value. That would be the US Dollar Index for you. Established in 1973 by the Federal Reserve, the US Dollar Index measures the value of the Dollar in comparison to other leading currencies, which include Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British Pound, and Swedish Krona.

Has the US Dollar Lost Its Value?

Not yet! The likelihood of the Dollar losing its value seems unlikely in the near future. But it’s not impossible. After all, currencies often collapse without any notice. Just ask Argentina, Hungary, and many other countries who witnessed the downfall of their currencies due to one incident or another.

The main reason behind a currency losing its value is when the people (specifically the investors) lose faith in the currency’s potential to perform as a medium of exchange. Of course, there would be other hands in play behind the downfall of something so crucial within mere days.
Let’s see what other factors might play a role in causing USD to tumble down from its throne:

Debt Ceiling Crossed

Every country collects taxes from its citizens to help maintain the public revenue and provide facilities & privileges to all. Food, electricity, goods & services, and many more items include a certain amount of tax value in them along with the usual cost. This amount collected is stored in the country’s treasury, which is then accessed by the country to carry on certain tasks. The government utilises the capital from the treasury to pay for the money required to construct roads, and public places, pay government personnel salaries, pensions, and many more.

The US government also has a treasury, one of the largest treasuries in the world actually. But there is one interesting fact many don’t know about these treasuries. The US government can’t just dip their hands inside it and take out however much they want. There is a debt ceiling amount up to which the government can lend or, should I say, handle the lending amount. If this ceiling is crossed, then the government would be in more danger of economic downfall.

But here's the interesting part, the US government has already raised the debt ceiling at least 78 times since 1960. That's right! In fact, the recent rise of the debt ceiling, which is $31.4 trillion as of June 2023, was done by the present president of America, Joe Biden, in 2021. This means that the USA is already neck-deep in debt and thus is showing signs of a currency downfall in the present time.

High Inflation

As inflation refers to the depreciation of money's buying power, it indirectly leads to currency devaluation. In case of high inflation, investors are more attracted towards commodities from foreign nations due to lower prices. This leads to an increase in imports and the continuous downfall of the nation's currency.

High-interest rates are a premium cause for inflation rise, which is also the reason behind the rise in foreign investments in the country's currency. A rise in inflation also reduces the investors' trust in the currency's ability to perform well in the near future. Thus investors shy away from investing in that currency, making it lose its value in the long term. This relationship between exchange rates and currency is hard to maintain as the rise in inflation impacts a currency's exchange rates negatively.   

Unstable Politics

USD still has huge power over the world as more than 62% of global currency reserves are held in it. Other international currencies like Euro, Japanese Yen, UK Pound, and Chinese Renminbi are also reserve currencies that are held in government or central banks. This shows the dominance of the USD even in the midst of the other reserve currencies. The stable and transparent government of the USA makes it easier for investors to keep their trust in the currency.

This is one thing which other currencies like the Yuan lack. As China's politics lacks transparency, it also affects its currency Yuan since not many understand the dynamics behind the working of the currency.  

So, in case of instability in terms of politics in the country, trust in USD can be in danger of declining. This fact is important to mention in light that USA's politics also affect other nations both directly and indirectly.

Occurrences That Would Take Place with USD’s Downfall

Let's assume for a moment that the US Dollar collapses. Then, what would the world face? Here are a few assumptions:

Global Economy Crisis

Since the US Dollar has been the king of currencies for a while now, since 1944, many of the operations are performed based on its value. Most importantly, countries accomplish their import and export businesses as per the USD value. So, these operations and many more that directly coincide with the economic standing of a nation would be affected by USD's downfall.
Nations taking debt from the International Monetary Fund & World Bank do so in US Dollars. So, the downfall of the currency would affect all the countries as the USD's exchange rates would decrease, causing a huge loss to the lending firms.

Increase in Taxes

If the global economic conditions were hit, the lifestyle standard of Americans would be highly impacted. This would lead to inflation which would then increase interest rates. Raised rates would lead to many people defaulting on their loans, which would then disturb the government’s economy. The government would find it difficult to get further debts from outer sources like the World Bank. Hence, they would have to rely heavily on the inner economy to fulfil all operations.
And, for those who are not aware of it, running a country as big as America won’t be possible by depending merely on the collective citizen tax. So, the double-digit inflation rise would then be a reality for the country.

Increase in Import Costs

As already stated before, the rise in inflation increases the possibility of imports for the country because of comparatively cheaper prices abroad. But the cost of importing goods is still a concern which would be a massive hurdle for America in case of the USD's downfall. Suppose America foregoes importing goods to decrease trade costs; they would then need to rely on their domestic production. But, the decline in USD will boost inflation in the country leading to little revenue generation from domestic production.

Simply put, the commodities produced from America would be costlier than the ones imported from other countries. So, the consumers would opt for the imported goods, leaving the US-produced ones to eat dust in the godowns. This means that America won’t achieve its required capital because of less revenue from its home production. Plus, the little revenue generated would then be utilised to pay for import costs in order to meet demands. The situation would be a no-win for America from both ends. 

Capital generated from trade contributes around 25% towards the USA's economy. This big figure cannot be ignored in the long run. So, the USA would look for more lenders increasing its already large bundle of debt. Hence, its debt will keep growing, leading to the further demise of the country's economy.

How Will the US Dollar Collapse Affect India?

When compared to the Indian Rupee, the US Dollar stands at the value of 82.56 INR today. The exchange rate of INR & USD keeps on changing every day. Despite other countries being highly dependent on foreign economies, India will suffer less. In fact, the reduction in US Dollars value would boost foreign investments in India. Since the fall of the Dollar entails a higher ROI for investors, Indian markets would become bullish, leading to a high inflow of Foreign Institutional Investments (FII) & Foreign Portfolio Investment (FPI).

This also affects the companies in the country as their foreign partners are bringing in more capital, boosting the company's growth. The reduction in Dollar value would entail an increase in exports as well. But the export angle has a different side as well. Being the largest importer of Crude Oil, India would see a rise in prices of oil as fuel and other oil commodities are traded using USD as their value. This would cause difficulties for India as the demand might reduce from foreign countries because of high prices.
This means that India might not be too negatively affected due to the USD decline, but it won't come out unscathed either.

The Bottom Line

Despite the warnings from multiple sources in the economic world, the likelihood of a US Dollar collapse seems unlikely for a few years or decades. The factors that would ultimately cause the demise of the USD are too far-fetched actually to take place in the present. Even if the factors do happen in real life, other countries will give their best to support USD because of its importance worldwide.

But nothing's for sure when it comes to the economic world. So, be vigilant with the ongoings of the finance world to make sure you receive the highest returns in your investments.