Weak dollar may push exporters to bill in euro
A weak dollar may encourage exporters to start billing in euros to increase their rupee returns.
By Gayatri Nayak & Preeti R Iyer, TNN |
MUMBAI: A weak dollar may encourage exporters to start billing in euros to increase their rupee returns. Between May 2006 and May 2007, the rupee gained 11.38% against the dollar, as against a 3% rise versus the euro. As a result, even though the dollar continues to dominate currency markets, the euro is gaining importance in trade.
According to Partha Mukherjee, head-treasury, UTI Bank, “This can be well-fathomed from the fact that several exporters, including software companies are moving in favour of the euro. Since the dollar is weakening against a basket of currencies, traders feel that the euro is a more stable option.”
While there are operational issues in billing in euro to non-European customers, exporters can still have the upside of a euro billing by using derivatives. “Exporters could enter into some kind of derivative contract that can synthetically expose themselves to the euro,” according to Samiran Chakravarty, chief economist, ICICI Bank.
If this has not happened in a big way, it is because companies are yet to take a longer term call on the dollar. It could well turn out that the present edge found by some exporters could be temporary. If the US Federal Reserve’s senses inflation and raises rates, the dollar could surge again.
Currently, the uncertainty on the Fed stance is making the euro more range-bound and the outlook on dollar very uncertain, according to analysts. It is still not clear whether the Fed will still go for one more round of rate hikes. While, the stance of the European Central Bank is more or less clear on this front.
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Despite the uncertainty there is a distinct shift happening out of the dollar and the yen. Also, the share of the euro in reserves is rising for most emerging market central banks. This, according to Mr Chakravarty, is largely on account of the yield differential between the euro zone and the US.The euro share in global foreign exchange reserves rose from nearly 18% at the start of 1999 to around 25% by the end of 2003, and thus comfortably exceeded the combined share in 1998 of the legacy currencies (including the ECU) participating in the European Economic Monetary Union (EMU) of almost 17%, notes a recent report by Deutsche Bank.
By contrast, the dollar share, which peaked at 71.4% in 2001, fell to 64.7% as of end-2006. The decline in the dollar is roughly equivalent to the ground made up by the euro.
The euro has gained considerable clout as an international trade, investment, anchor and reserve currency over recent years and has firmly established itself as No 2, behind the dollar, the Deutsche report notes. That is why, for the first time in many decades, there is serious debate about whether the dollar will remain the premier international currency going forward, according to Deutsche.
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