The myth of currency price fixing

The Dollar Index (DXY), which measures the value of the US dollar against six other currencies, is at a 20-year high, up 10% YTD (year to date) and 15% when compared to the same period last year. So, it is not just the Bangladeshi taka which is losing value in comparison to the US dollar. 

The US Federal Reserve's increase in interest rates to combat inflation is the first force behind the dollar's strength. Advancements in inflation will have political repercussions that will cause central banks to change their hawkish stance. They will be willing to forgo calculations to keep inflation under control. 

The major problem is that in contrast to earlier decades when inflation stayed low due to globalisation, there is now a feeling of confinement brought on by regionalisation caused by conflicts between the US and China, and Russia and Ukraine.

The increase in demand led to a rise in the value of the dollar relative to several advanced and developing world currencies. Because inflation often has a scorching political cost, the rise of the dollar will have a more subtle effect on society. 

Since World War II, western nations have not experienced such high levels of inflation, and the severe repercussions are now starting to manifest. The economies of the Eurozone will contribute to the rise in policy rates. The Euro and the US dollar have reached parity.

This might ultimately force dependent nations to deviate from US economic policy practices and push for bilateral uniformity. The most pleasant example is India's economic strategy. While the US and China are closely related, India's refusal to adopt US economic methods may serve as a popular example for smaller countries as well, given its geopolitical position as China's counter-financial creditor.

On the other hand, emerging markets are nearly always the most susceptible. 

A tortuous willow has been managed by the World Bank. 12 countries are now experiencing hyperinflation, including Turkeye, Argentina, and Lebanon. Indicators of growing inflation are also visible in Bangladesh. Instead of using taka, people are choosing to finance their maintenance through non-financial investments like housing and real estate.

External debt reimbursements would be unsustainable if the currency was boosted. Bangladesh would be obliged to move to non-dollar trade compensation, at least with adjacent nations such as India and China. 

Budgetary instruction from the World Bank, the International Monetary Fund, or the Asian Development Bank should convey some solidity to the falling Bangladeshi taka, but this is a long-term macro predicament that will necessitate rudimentary adjustments in the economy.

The slope toward the central bank's dollar-pump agenda has always been to artificially maintain the value of the dollar at or close to Tk85. Nonetheless, this approach is complicated because, by now, cost fixing has never followed. 

On the contrary, the longer costs are specified, the more brutal the repercussions will be. Market forces inevitably triumph, whether it be a price base or a price top. The country's facility to fabricate abundant foreign reserves, whether via exports, remittances, investments, or more borrowing, encompasses the significance of a currency. The value of the taka gains as the number of foreign funds drops.

One noteworthy deficiency of an overrated currency is that exports lose their competitiveness in the international market, which causes a drop and then enlarges the comprehensive trade imbalance. During the years when the thunderclap rate was 'reach', imports drove consumption, which in perspective was financed by added dollars. 

The taka's response would imply that individuals who stop endowing favour an overpriced taka, which would be destructive to exports. More crucially, it would devalue import costs, increasing demand for dollars to satisfy consumer hunger at a time when borrowing funds in dollars is becoming incredibly expensive.

When the country's reserves are all at $36 billion during such a macro scenario when major currencies are falling, the taka does not have an unintentional decline. 

Exports lack the appearance of a diverse edge, making long-term and substantial gains in export revenues a pipe dream. Bangladeshi expatriates efficiently send remittances although there is a significant disparity in the number of manpower exports and remittance earnings. 

The biggest concerns are the emergence of digital hundi and interchange rates. Given the world's overall climate, foreign direct investment has remained deplorably low and is unlikely to rise any time soon. 

Either the economy can be reformed and restructured to lessen its reliance upon import-driven spending, or it may experience an abnormally brief go-to-come cycle past collapsing and then again incur much more debt later.

Sk Shamim Iqbal is a faculty member at SIBL Training Institute.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.