Wednesday, March 19, 2008

Banana Dollar — Part 3

Would you believe that Vietnamese now prefer their own currency, the dong, to the dollar. A Wall Street Journal story of March 19, 2008, reported that Vietnamese have suddenly lost confidence in the dollar, a currency that has been widely used in Vietnam as a matter of confidence and utility given that the largest denomination 500,000 dong bill is worth only about $31.

What happened? To curtail inflation, the Vietnam government has relaxed its exchange rate to allow the dong to fluctuate more freely against the dollar, from a daily range of 1 to 2 percent. In response, the dong has steadily appreciated since January 1 of this year from over 16,030 to about 15,855 against the dollar. In the gold shops and cafes, the dong is valued at a still higher 15,500.

Given the expectation of further gains, bank tellers have been turning away visitors trying to exchange dollars for dongs. Digital displays of exchange rates have been turned off. Vietnamese have been withdrawing money from dollar accounts to make dong deposits. Exporters are having trouble repatriating dollars for dong.

As noted in an earlier posting, India no longer accepts dollars at the Taj Mahal and other museums. Kuwait has abandoned its dollar peg in favor of a currency basket. Other Gulf States are contemplating similar adjustments. King dollar has fallen off its pedestal.

Secretary of the Treasury Henry Paulson keeps repeating the mantra that the U.S. wants a "strong dollar." As he continues to utter the phrase, if and when there is a real run in the dollar, he may find himself as the secretary who cried wolf once too often.

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