DOLLAR IS NOT LOSING GROUND

What will happen to the US dollar? This question continues to agitate the minds of both the powers that be and ordinary inhabitants of the planet as a sharp drop in US currency may have many negative consequences at both global and domestic levels. The subject of what "pros" and "cons" the collapse of the "empire of the US dollar" may have for us is still relevant.

Dollar against euro

Let's start with the global issue. As recently as August 2011, the international rating agency Standard & Poor's downgraded the US credit rating by one level - to AA+. It is worth noting that the rating of the US had stood at the highest level (AAA) since 1941 and there had been no downgrading since 1917.

"The downgrading of the rating reflects our assessment of the long-term plan to strengthen the US economy endorsed by Congress and the White House. In our opinion, it does not provide for the uninterrupted servicing by the American government of its debt obligations in the medium-term," S & P said in a statement.

In other words, one of the world's leading agencies expressed doubts about the viability of the US economy. Experts immediately agreed that "the decline in the sovereign rating of the US will lead to the further weakening of the US currency". But this did not happen. In the "dollar-euro" confrontation, the dollar gained a landslide victory in the first week of January this year: on 11 January, the euro fell against the dollar against the backdrop of expectations of GDP data for Germany in 2011 and the placement of debt securities by Italy and Spain. On the morning of 11 January, the euro fell to 1.2757 dollars from 1.2778 on the previous day. The exchange rate of the dollar against the basket of six currencies of major trading partners of the United States increased by 0.14 per cent - up to 81.00 points. The fact is that investors expect the publication of 2011 GDP data for Germany with pessimism: the growth of the country's economy may have slowed to 3 per cent from 3.6 per cent a year earlier. The rate is also affected by the information on the reduction of the volume of industrial production in the eurozone. Against the background of the critical situation in Europe, according to the market strategist of WestpacBankingCorp, Imre Speiser, "in the next 3 months, the euro may fall to $ 1.2".

It would seem that the US currency has all the chances of regaining its "glory" today. Especially as MorganStanley analysts expect that in 2012, the "dollar will significantly strengthen against the major currencies except the yen, which maintains its status as the safest currency".

And the only obstacle for the strengthening of the dollar, according to experts, can be a new round of quantitative easing, or the so-called QE3, which is expected to start in mid-2012. "However, even this factor will have only a limited effect on the behaviour of the currency," MorganStanley believes. Time will tell how "limited" it is. Meanwhile, fuel to the fire is added by the United States itself: the US Federal Reserve System continues to print dollars that are not backed by gold. The "printing press" is active against the background of the lack of business investment in the economy, i.e. the economy is literally "flooded" with cheap money, which may lead to a further depreciation of the currency and hyperinflation...

It is obvious that against the backdrop of the destabilization of the US financial system and the collapse of the euro area, the US currency cannot be a reliable "shelter" for global investors - the crisis in the eurozone will sooner or later have an impact on US banks, which may have negative consequences for the dollar. For this reason, today, even against the background of the growth in the rate of the US currency for the euro, it is of no benefit to carry out transactions in US dollars. In addition, the crisis of 2008 showed that relying on one single currency is at least irrational. Moreover, as a monetary unit, the US dollar has not inspired confidence in the Americans themselves for a long time.

Coming to a common denominator

That is why today the search for an alternative to the dollar (and in practice, the euro, too) for payments in international trade and other financial transactions is continuing. And this currency has to suit all without exception. In March 2009, ahead of the G20 summit, such a proposal was made by Russia, which reached an agreement with Belarus in 2008 on mutual payments in Russian roubles, which were undoubtedly more powerful than the Belarusian currency. The first "go-ahead" was received from China. But even after 2.5 years, the countries have not yet agreed on an alternative to the "greenback". Most likely, the reason is that a huge part of China's gold and foreign currency reserves ($ 3.2 trillion) is kept in US dollars. The desire to find a replacement for the dollar is supported by many developing countries. But "support" does not mean a "decision". As a consequence, there is still no real alternative to the US dollar. So, today the creation of a complete unified world currency is just empty talk.

Nevertheless, the first steps in this direction have already been taken. Japan and China have decided to abandon the US dollar in mutual settlements - they agreed to promote only the use of the yen and yuan. Iran and Russia also agreed to use their own currencies instead of the dollar in bilateral trade. In the past two years, Iran itself has been consistently trying to replace the dollar with other currencies in trade with the outside world. For example, Iran has switched to alternative currencies in oil trade with India, China and Japan. Russia's Gazprom and Ukraine are switching to settlements in roubles. Also, at the Turkish-Russian business forum in Moscow in early 2009, Turkish President Abdullah Gul suggested that the Russian Federation abandon the dollar and euro and switch to the rouble and Turkish lira in mutual settlements. As a result, the Turkish bank Garanti started to use the Russian rouble for mediation in import and export operations. This decision is more than justified: Russia and Turkey are major trading partners. And there are masses of examples for that.

Changes in this direction may take place in Azerbaijan as well. According to the president of the Association of Banks of Azerbaijan (ABA), Eldar Ismayilov, "today there is a need for the interpenetration of the banking systems of GUAM member countries, which should also abandon the use of a third currency". According to him, "if the volume of trade between GUAM countries is small, losses from the falling dollar are not tangible": "But soon, the level of trade between GUAM countries may increase, and we should think seriously about attaching goods to national currencies," he said.

In turn, the CIS Executive Committee has developed a concept and plan of measures of cooperation and coordination between CIS countries in the monetary sphere until 2017. According to the president of the CIS Finance and Banking Council (FBC) and chairman of the board of the VTB Bank, Andrey Kostin, "creating a single currency area is a gradual process". "In the first stage, it is necessary to create a system of mutual settlements in national currencies, and as an extension - a single currency area," Kostin says. In his opinion, the Customs Union (Russia, Kazakhstan and Belarus) and the Common Economic Area (the project on the economic integration of three CIS countries - Russia, Kazakhstan and Belarus) will "expedite the process".

It must be noted that the main objectives of the above concept are the introduction of interstate payments in national currencies, provision of conditions for the conversion of international exchange, organization of an integrated currency market for the CIS followed by the creation of separate elements of the common currency area, reaching agreement on a collective currency. It could eventually become both an international means of payment and reserve currency.

For Azerbaijan, the creation of a reserve currency is especially important - the country is an exporter of goods of strategic importance. Against the backdrop of the weak dollar (euro) and strong national currency, the switch to payments in our own currency is simply necessary for its further strengthening and for the avoidance of financial losses in oil and gas exports. It is no secret that 90 per cent of Azerbaijan's exports are oil and oil products. Soon, a huge amount of Azerbaijani gas will come to Europe. Major trading partners of Azerbaijan are European countries - Italy and France, and the weakness of the euro undoubtedly has a negative effect on Azerbaijani export.

But let's get back to oil and gas. On 1 April 2011, the investment portfolio of the State Oil Fund of Azerbaijan (SOFAR) reached $ 25,779,320,000. At the same time, 55.26 per cent of the funds are in US dollars ($ 14,244,610,000), 39.67 per cent - in euros (7,236,060,000 euros), 5.07 per cent - in British pounds (813,210 million pounds), and 0.07 per cent - in manats ($17,536,280 manats).

The foreign exchange reserves of the Central Bank of Azerbaijan, which reached a record high - $ 10,481,500,000 - on 1 January 2012, are kept in dollars, euros and pounds. Moreover, the US currency makes up 60 per cent and the European and British currencies - 40 per cent of the funds. Therefore, the leadership of our country has every reason to take the country away from dependence on the dollar or any other currency.

Back in 2007, information was made public that Azerbaijan is ready for mutual settlements with other countries, i.e. sell oil and gas in manats. Is it possible to turn the manat into an international reserve currency? In the longer-term, it is. But first, the manat must become an intra-regional currency and Azerbaijan's neighbours - Turkey, Russia, Georgia and Iran - must agree to use the manat in international payments...

As we can see, players of the world export of strategic goods, including Russia and China, are attempting to create a new reserve currency. However, these steps are separate, although many perceive them as the first stage in the search for a single global currency that could oust the dollar from world trade and "strangle" this annoying currency. And until we find a common denominator, the US dollar will remain high in the saddle as before. But against the background of the deepening crisis in the eurozone, this statement is acquiring increasingly clear outlines.

Entrusting savings

And now onto the most important issue. Ordinary citizens are concerned about the question: in what currency is it better to keep savings? How do you earn from the volatility of exchange rates? The fall of the dollar or the euro is not a guide for action to scrape together some money and take it to the nearest exchange office in order to exchange it for manats. Certainly, the financial system of Azerbaijan demonstrates stability, and even at the time of crisis, our national currency did not depreciate, and the Azerbaijani manat is stable. But despite all the "pros", there is no need to get rid of US dollars.

First, we have concluded that there is no alternative to the US dollar. Second, its rate is growing. Third, many countries are conducting an exchange rate policy through the mechanism of the currency basket, which includes the dollar and the euro, say, 70 to 30. That is, you should use the classic "basket" of 50 to 50 and divide your savings equally between two currencies such as the dollar and the euro. And if the US currency is "falling", the European one is growing accordingly.

The "dollar-manat" proportion is also very relevant. By the way, since 10 January 2011, the Central Bank of Azerbaijan has refused to conduct its exchange rate policy through the "euro/US dollar" currency basket and adopted the bilateral targeting of the "US dollar/manat" rate. This decision was due to a further deterioration in the volatility of major currencies and mutual devaluation of national currencies of developing countries. This mechanism, as indicated by the CBA, is "more acceptable for influencing the level of inflation". In addition, it raises the possibility of adopting a free floating exchange rate in the long-run.

By the way, local banks offer customers "multi-currency deposits" that can help you diversify your savings and thus minimize the risks arising from inflation or currency fluctuations. And for current expenses, it is better to withdraw money from the account in the foreign currency for which the demand is higher. Fortunately, the financial pyramids of the 1990s have sunk into oblivion, and money in the bank yields good interest depending on the size of the deposit. It should be remembered that the country is running the Azerbaijan Deposit Insurance Fund (ADIF). All deposits in ADIF member banks are insured in their entirety, but in an amount that does not exceed 30 thousand manats - this is the highest figure in the CIS. So, if the bank "bursts", you have a real chance of recovering your money now.

...The fact remains that against the background of numerous crises and turmoil, for most of the world's population, whether it is Americans or Europeans, the most topical issue is not creating a new world reserve currency, but, no matter how banal it sounds, preserving and increasing their welfare. Today, you can open accounts in banks, buy real estate, antiques and play on the stock market... And, after all, no one has repealed gold ingots which are in short supply today to feed the large "army" of ubiquitous American banknotes.