Global Policy Forum

By Tony Sitathan

As a US-led war rages in Iraq, the almighty US dollar is under fire as the international currency of choice in Indonesia. Businesses, the central bank and some in government are eyeing the euro as an international transaction medium that could be less volatile in the long term and might carry less political baggage.

"The euro seems to have appreciated against most baskets of currencies while the US dollar has depreciated in value," said K Gigendra, a money changer with CV Tri Tunggal in Jakarta.

The ongoing Iraq crisis has had a direct impact on the softening of the US dollar amid the strengthening of the euro. The continued dismal performance of the US corporate sector and its poor corporate earnings this quarter have also served to weaken the dollar since the onset of the Iraq war.

Adrian Low, an economist with Axiom Consulting based in Hong Kong, says there are signs of a further slowdown in the US economy. "Consumer spending in the US has tapered off by almost 3 percent this quarter and we see signs of a slowing down in all fundamental sectors of the economy. There has also been a slowdown in the semiconductor industry's sales as well as dip in the overall share prices of blue-chip companies by [about] 10-15 percent on average this quarter," he said.

The overall weakness in the US economy has created an adverse reaction to the dollar, which has long been considered the international benchmark for foreign currencies and international reserves. Low notes that the backlash against the dollar comes in the face of mounting opposition to US foreign policy and Washington's decision to attack Iraq at a time of great economic uncertainty in the marketplace.

"The US has picked a bad time for invading Iraq without the support of the world community. There is also the big question of who is going to pick [up] the war tab that could easily surpass US$1 trillion if the war continues for three to four months instead of the earlier predicted two to three weeks. The longer Saddam Hussein holds out, the more expensive it becomes," stressed Low.

The political backlash against the United States is becoming more apparent in Indonesia, where some want to look at the euro more carefully as the currency of choice. There are reports in financial circles that Indonesia's central bank, Bank Indonesia (BI), is considering the use of the euro for Indonesia's foreign-exchange reserves after the increasing value of the euro during the past few weeks. BI governor Syahril Sabirin has said that there are intentions to study the long-term conditions of the European economy and that a discussion paper on the viability of the euro will be shortly be released internally to the Ministry of Finance for consideration.

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