Dollar on the Decline

As recessionary fears diminish, anxiety regarding global demand for the U.S. dollar is rising. The dollar’s value has sunk 11.2% on the NYSE in just four months and the inflating dollar has hit its lowest level of 2009 against six leader currencies, including the Euro, the Pound and the Swiss Franc. Foreign central banks are diversifying their assets away from the dollar, and buying up non-dollar assets with greater enthusiasm than ever before. The decline of the dollar has triggered much speculation about U.S. competitiveness and the currency’s strength in the world market. A devalued dollar has many implications for global trade, economic stability and political relations.

For American consumers, a weak dollar in the long run may mean paying more for imported goods, as well as spending extra when traveling abroad. A 5% increase in the annual rate for import prices is hurting the lowest 20% of consumers, namely Wal-mart shoppers. Politically, many believe that we give up our power as a financial world leader if other currencies move away from using the dollar as the world reserve currency. They claim that as the dollar devalues, we have less purchasing power and capital than the rest of the world, increasing our risk of high interest rates and inflation. This could result in major changes to American jobs and living standards.

In international trade relations, the fall of the dollar is likely to have a significant impact on the recovery of European auto companies and industrial exporters. Analysts predict that the dollar will continue to drop, reaching $1.60 against the euro by January 2010. This relative strength of the euro could put strain on trade relations with big European exporters, like Germany, who are already ailing due to the global economic slump.

One positive result of the 20% decline in the dollar’s value is that U.S. exports are once again competitive overseas. According to the New York Times, a weak dollar could boost the American economy by helping suffering manufacturers, rebuilding a stronger industrial base, and lifting exports. Some analysts even assert that a gradual decline is perfectly healthy following the appreciation of the dollar by over 40% between 1995 and 2000. A lower valued USD will bring the global economy back into balance, they say. But, the dollar’s future looks dicey, as the Federal Research maintains low interest rates, possibly driving down prices for Treasury bills (conversely driving up interest rates in the long-run.) Stay tuned to see how the greenback fares in the global marketplace and the implications of this currency crisis are revealed.