Our currency, your problem

Two items in the news today point to the increasing problems created by a U.S. dollar that continues to rapidly lose value against other floating currencies.

Bloomberg reports on Hong Kong currency traders expecting a revaluation or the abandonment of the peg to the U.S. dollar that has persisted for 24 years as foreign investment floods the city and inflation pressure mounts.

In the forward currency market, an investor can buy Hong Kong dollars now for delivery in 12 months at HK$7.7106 per U.S. dollar, above the HK$7.75 top of the Hong Kong Monetary Authority's permitted trading range. The authority sold HK$7.828 billion ($1 billion) to defend the currency yesterday, twice as much as two previous interventions since Oct. 23.

Investors are buying Hong Kong stocks and property to benefit from the growth of China's economy, which expanded at an annual pace of 11.5 percent in the third quarter. HKMA Chief Executive Joseph Yam, who spent $15 billion stopping the currency from weakening in 1998, said today speculation that he is considering changes in the peg are unfounded.

"The pricing in the forward market shows that money is being placed on bets that Hong Kong will re-value,'' said Chris Turner, head of currency research at ING Financial Markets in London, who expects the authority will prevail. "Currencies around the world with a dollar peg are under pressure given the U.S. dollar's weakness.''

The Hong Kong dollar, allowed to trade 5 cents either side of HK$7.8, was at HK$7.7567 per U.S. dollar at 7:22 a.m. in New York. The U.S. Dollar Index, measuring the dollar's performance against six major peers, has lost 8.5 percent in 2007 and set a record low of 76.465 yesterday. The Chinese yuan has risen 4.5 percent this year to 7.4528 per dollar.

An article($) in the The Wall Street Journal tells of the problems experienced by Indian workers in Dubai when they send their hard earned money home.

In this oil-fueled boomtown, which runs on imported labor, the dollar's sharp tumble is contributing to civil strife. In recent days, thousands of expatriate construction workers walked off job sites to protest low pay and the rising cost of living.
...
But officials are finding it more difficult to deal with what has increasingly become one of the workers' chief complaints: A weak dollar, coupled with rampant inflation, means it is hard to send enough money home to make it worth sticking around.
...
"At this moment, we are still seeing that linking the currency with the dollar is the best option," says Abdulla bin Ahmed al Saleh, the ministry's undersecretary for economics. He says new housing expected to be finished in coming months will help ease the UAE's soaring cost of living, and foreign direct investment continues to flood into the country. Mr. al Saleh also says employers are increasing salaries.

But many workers say the increases aren't keeping up. This summer, Jassa Singh, a skilled carpenter from India, was making about 900 dirhams ($250) a month working for Commodore Contracting Co., a construction and contracting firm based in the neighboring emirate of Abu Dhabi. He said he watches the dirham-rupee exchange rate closely to gauge how much he can send home to his family in the Punjab region.

About eighteen months ago, one dirham bought 12.5 rupees. Since then, the dollar has weakened against the rupee, and therefore so has the dirham. Now the dirham is worth 10.7 rupees. "If it goes to eight rupees, we go [back] to India," Mr. Singh said.

Our currency, your problem.