LETTERS: Dollar's strength

Apropos A V Rajwade’s column on world money (October 20) and Rajesh Balasubramanian’s response on the dollar (October 22), the dollar derives its strength from the Bretton Woods days when it was decided that the dollar will be used as a universal currency and that it is convertible to gold at a fixed rate of $35 per ounce.

As world trade expanded and as the gold reserves with the US were not sufficient to cover the increased requirement of the dollar as a reserve currency, the pressure on the US for conversion of the dollar to gold became unsustainable, and in 1971, the US unilaterally announced it was suspending the conversion of dollar into gold clause.

Since then, as the dollar has become a reserve currency, all countries started accumulating their foreign exchange in it. The increase in reserves was facilitated by the increase in US current account and fiscal deficits year after year. As a result, the massive reserves the US holds have become the dollar’s strength as any decrease in the value of the dollar affects the wealth value of dollar reserve holders.

As the stock market has crashed, more money is flowing into the dollar as a stock reserve, thereby increasing the demand for dollars though the US economy itself is showing signs of depression.

P Esakki Muthu, Mumbai