IMF's Gita Gopinath Drops Facts; Reveals Dollar Is Likely To...

Former IMF Chief Economist and Deputy Managing Director, Gita Gopinath, now a Harvard Professor, believes the US Dollar's dominance was unlikely to change in the near future. Speaking at an IMF Podcast, Gopinath revealed that she was interested in the subject of dollar dominance, especially the "asymmetry and power it (US Dollar) had in the world".

Addressing the million-dollar question on whether the US dollar's dominance was likely to change in any way, Gopinath answered, "as of now, I don't see major changes."

She added, "What is critical to the dollar's dominance in the world are the strength of its institutions and the depth and liquidity of its financial markets and the law and order in the country. So all these features have been absolutely supportive of dollar dominance, and as long as those remain, I would say that the dollar would keep its status for a long time."

The American Dollar's dominance has been a part of social discussions since a long time. More recently, tariffs and America's soaring debts worried investors although America's piling debts remained concerning during the Pandemic. In the podcast, Gopinath explained, "the importance of any currency in the world depends upon how much one trades with the world. But the reality is so far from that."

WHAT IS CURRENCY STRENGTH & WHY IT MATTERS?

Although the US Dollar is a reserve currency, it is not the only currency. Other currencies such as British Pound Sterling, Euro, Australian Dollar, Swiss Franc, Japanese Yen, Canadian Dollar and the Chinese Renminbi. The Deutsche Mark (DM) was the second most widely accepted currency before the Euro got inducted. So, a currency's strength is an indicator of how strong or weaker a currency is against a basket of the above reserve currencies.

When one says that the US dollar is getting stronger, it means more domestic currency would have to be supplied to purchase a commodity or service. For example, if an iPhone costs $1,000 - a stronger Dollar price means more outgo of Indian Rupees. Some years ago, Finance Minister Nirmala Sitharaman had clearly explained that the Rupee was not turning weaker but that the Dollar was turning stronger.

When a reserve currency such as US Dollar gets stronger, it affects most Indians - petrol products turn expensive, imported goods such as smartphones or electronics are costlier, causing inflation in emerging markets such as that of India. Dollar's appreciation is hence a cause of concern.