The fallout from a falling dollar
The Christian Science Monitor gives some background info on the implications resulting from the falling dollar
• It could imperil the economy next year because Fed Chairman Ben Bernanke might have to defend the currency with higher interest rates.
• A lower-valued dollar makes imports more expensive, possibly ratcheting up the inflation rate. But it could also stimulate US exports, thus providing more jobs.
• This summer, Americans traveling abroad will feel as if everything is expensive. However, foreigners coming to America will feel as if the country is one giant Wal-Mart.
Financing the current US trade deficit is requiring increasing agility. “Every business day requires $3.5 billion of net new money entering the country to finance the current account deficit,” says Jay Bryson, an international economist at Wachovia Securities in Charlotte, N.C.
Most of that money comes from foreign central banks, which own large amounts of dollars. Recently, however, the central banks of Sweden, Finland, and Russia have said they will diversify their foreign reserve holdings and reduce their US dollars.
Behind the shift may be concern that the dollar will be devalued, making their holdings worth less. Ten-year US securities, for example, have started to reflect this risk.
To date, the imbalance has not caused much economic pain, Mr. Bryson says. The dollar, on a trade-weighted basis, is actually higher than it was last year at this time. But it’s down about 12 percent from its highs at the end of the 1990s.
He cautions, however, “My guess is that sooner or later, probably later, foreigners will get tired of financing us, and at that point, long-term rates will start to rise.”
One way to keep foreign investors interested in US dollars is to raise interest rates, says Mr. Chan. But the risk, he says, is that “we slow down to the point where it may even become a recession.”