RAP STARS, OIL PRODUCERS AND CATWALK MODELS ARE DOING IT – WILL INDONESIAN TRADERS JOIN THE DASH FROM THE FLAGGING US DOLLAR? DEVI ASMARANI REPORTS

American rap star Jay-Z caught the attention of more than his fans recently when he flaunted wads of €500 notes – not US Dollars (USD) – in his new music video. The video came hot on the heels of reports that one of the world’s richest models, Brazilian Gisele Bündchen, now prefers to be paid in Euros.

Observers wonder if such “currency defection” from USD to Euro could be a sign that the once mighty greenback is not just down, it may be on its way out as the world’s dominant currency.

In the last five years, the USD has been on a steady downward trend, driven by the US’s huge current account deficit, the strength of the Euro, the rise of Asian economies like China and India, and last year’s US housing credit crunch.

Since 2002, the USD has slipped 44 per cent against the Euro and about 20 per cent against major currencies. Yet the Indonesia Rupiah has not strengthened against the greenback, dampened by concerns that international oil price rises might drive up domestic inflation.

The US is Indonesia’s third largest export destination after Japan and Europe, and Indonesia’s exporters have now begun to` feel the heat from the USD’s slump.

Australian native Warwick Purser, who owns a furniture and handicraft company in Indonesia, says US customers like Target, Pot Plus and Pottery Barn have cancelled or reduced their orders in the past five months, leading to a 40 per cent drop in business.

“It is a double-edged sword for us. The US major retailers are suffering because of the recession and looking for cheaper alternatives. Or trying to bargain down existing orders as much as possible,” Purser explains.

At about US$6 million a year, sales to the US are 65 per cent of Purser’s total exports. All transactions are conducted in USD, further slashing earnings. Yet switching currencies is not a likely option, he adds.

“The USD is the standard currency even in the European market. It is a disadvantage, but we have to abide by our customers’ policy,” he says.

Today, about 80 per cent of international transactions by Indonesian exporters are conducted in USD. According to the Indonesian Exporters Association, this trend is likely to hold.

“Some companies may have switched to the Euro, yen or the currencies in their countries of destination – but these are very small in number,” the association’s secretary general Toto Dirgantara says.

“Most companies still deal in USD. It will be a hassle for them to convert. Many exporters pay for imported raw materials in dollars,” he adds.

The tourism industry may be among the first to reduce its reliance on the USD. Christiane Muller, who co-owns and runs Froggies Divers in North Sulawesi, began publishing her resort’s rates in Euros two years ago. “The USD was so low, we were losing money fast,” she says.

Yet many luxury hotels and larger agencies still publish their rates in USD. “I think the impact of the USD decline is still bearable for now. As the conventional transaction modes are still the USD, we still stick with it,” says chairman of Inbound Tour Operators Club, Arievaldy Kumarga.

Global forces may help decide Indonesia’s destiny with the dollar.

Several countries have already moved to protect their financial interests by shifting their foreign reserves from the USD, or conducting major international transactions in other currencies.

China dropped its dollar peg in 2005, and said last year that it would “favor stronger currencies over weaker ones”. South Korea, Russia and Sudan plan to convert their USD holdings to Euros, while several oil-rich Gulf states have revealed or hinted at plans to end their USD pegs.

Eighty per cent of Iran’s oil exports are already in non-USD currencies. Tehran has proposed that international oil transactions be conducted in Euros instead of USD. Indonesia, a member of the Organization of the Petroleum Exporting Countries (OPEC), has agreed to the proposal. Even drug dealers, Russian oligarchs and black market traffickers reportedly no longer trade in greenbacks.

Fauzi Halim, a senior currency dealer at PT Bank Resona Perdania in Jakarta, says the Euro is the favorite currency among his clients, along with the rising Australian Dollar. Yet the current trend is too precarious to be seen as permanent.

“For the next one to two years, Euro will remain a favorite currency because the USD remains volatile. But market players know that when something rises too fast, it is not sustainable,” explains Halim.

“In the long run, the Euro cannot stay too dominant without disrupting global economic stability. So for this sake the USD needs to return to normal.”

SLIPPERY SLOPE:

Tracking the greenback’s fall from grace

2007

12 December – US, European and Canadian central banks agree to jointly help banks deal with credit crunch.

22 November – Airbus says weak US Dollar (USD) is threatening its survival.

18 November – Iranian President Mahmoud Ahmadinejad suggests an end to the trading of oil in USD at OPEC summit in Saudi Arabia.

26 September – The USD falls to another Euro low at US$1.42 after US consumer confidence drops.

10 August – Central banks pour US$38 billion into the banking system to ward off a global credit crisis, the largest amount of liquidity since the days after the September 11 attacks.

2005

21 July – China scraps yuan peg to USD, and ties it to a basket of international currencies.

23 February – USD drops against major currencies over concerns that central banks may cut their USD holdings. South Korea says it will boost holdings of Australian and Canadian dollars.

2004

23 December – USD falls to new record low at US$1.35 against the Euro after data fuels fresh concerns about the US economy.

2002

1 January – The European Commission produces new Euro notes and coins after introducing it as an accounting currency in 1999.