Dollar's Tumble and Turkey

The dollar continuing to plummet after the U. S. presidential elections on November 2, now trades above €1.32 in foreign exchange markets. Trust in the American economy is gradually weakening. Foreign investors are withdrawing from American markets.The U. S. Federal Reserve does not favor raising increase rates radically, while problems caused by the weak dollar have risen throughout the world.

The people affected the most are those who try to earn dollars by holding dollars, while spending other currencies. First Europe and Japan and many other countries experienced losses in their export markets out of fear that their currencies will be overvalued; on the other hand, the United States, inspite of the advantages of a weak dollar, still has gigantic foreign trade and current account deficits. Meanwhile, in Turkey, the dollar is falling due to two reasons: one is the exchange rate, and the other is the entry of "hot money."

Part of this hot money is in the stock exchange market and the other in state bonds and transfers. The dollars cashed by foreigners means there is an abundance of foreign currency in Turkey The reserves of the Central Bank, which has been buying foreign currencies for one year, are at record levels. As everyone knows, until instability sets in, this kind of situation continues until "hot money" finds more profitable markets.

While the whole world is complaining about the dollar's fall, Turkey does not seem to worry. The exporter also does not complain as he used to do in the past. What is the reason? It is euro-dollar exchange rate. Turkey exports mostly to Europe and is paid in euro. The data of the first nine months in 2004 show that 42.9 percent of the exports are in dollars, 49.5 in euros and other currencies. On the other hand, 54.8 percent of the imports are in dollars and 40.4 percent in euros.

Henceforth, Turkey will not really be affected by a weak dollar, on the contrary, it will benefit. Because a great amount of imports for the investments and intermediary goods are in dollars, it provides a fundamental advantage cost-wise for the Turkish industrialists. Besides, because our debts are in dollars, it is also advatageous. We also pay for natural gas and oil, which are one of our chief import commodities, in dollars. In addition to this, the rise in energy costs is also a reality.

Those who export in euros at the micro level are in a good condition. For instance, a dress maker who buys clothes across the Far East in dollars and sells his products to Europe in euros enjoys, but those who do the reverse are having dificulties. The most important risk of these goings-on is the danger of "hot money" suddenly being withdrawn from Turkey, should the U. S. decide to raise interest rates to curb the greenback's rapid fall. If the dollar gradually arrives at its previous levels, this might turn the advantage in foreign trade into a disadvantage. The weak dollar even today is a crucial factor encouraging high imports since more goods are purchased because they are cheap, meaning a problem for the current account deficit.

As for our citizens who hold foreign currencies...

The dollar holders seem to have suffered severe losses for two years both against the Turkish lira (TL) and the euro. When the inflation rate is added to this, the losses greatly multiply but it is very difficult to guess where the dollar's fall will end; however, this is a situation that perturbs every country in the world.

While making a choice between the euro and dollar, we must not to ignore the TL by putting all our eggs in one basket Lastly, we are also supposed to think about the situation as one setting out and the other returning.