Thursday, May 22, 2008

Banana Dollar — Part 5

The saga of the falling dollar continues, in Ukraine of all places. Ukraine is one of the poorest countries in Eastern Europe, with a per capita income of about $1,500 in exchange rate terms and about $6,900 in purchasing power parity terms. Ukraine’s central bank, the National Bank of Ukraine, has generally fixed its currency, the hryvnia, against the dollar. In August 2005, it set the rate at 5.05 to the dollar. The dollar’s continuing slide contributes to inflationary pressure on countries whose currencies are fixed to the dollar. A stronger currency would help to reduce inflation by making imports cheaper, which brings down prices

To counter the impact of the weak dollar on Ukraine’s double-digit inflation, on May 21, 2008, the National Bank of Ukraine reset the hryvnia at a target rate of 4.85 to the dollar. Currency traders, anticipating further revaluation, pushed the hryvnia to 4.55 to the dollar, an appreciation of 10 percent.

Something must be wrong with U.S. monetary policy when such poor countries as Ukraine find it necessary to revalue their currencies against what was once the good-as-gold almighty dollar.