hen Will the Dollar's Decline End?
By [http://ezinearticles.com/?expert=Richard_Pettinger]Richard Pettinger
The dollar has been falling for several years. The weakness of the dollar threatens to undermine the American economy and the global economy. To predict the future trend of the dollar we need to understand why the dollar is falling in the first place. Many of these factors are still in place and explain why the dollar may continue to fall.
Why Dollar is Dropping
1. Large Current Account Deficit.
A large current account deficit means that imports of goods and services are greater than the value of exports. A deficit doesn't mean that a currency has to devalue. However, the problem is that the US current account deficit is over 5% of GDP and now the US is struggling to attract sufficient capital flows to pay for the current account deficit. With capital inflows drying up it means the currency is likely to fall.
2. Low Interest Rates
The Fed is responding to the slow down in the economy by cutting interest rates. As interest rates fall it is less attractive for foreign investors to buy US securities and save in the US. Therefore, there is less hot money flows coming into the US. This is quite significant because recently the US interest rates became lower than the interest rates in China. It meant that there is less incentive for the Chinese to use their surplus foreign exchange to buy dollar assets.
3. Nobody wants the Dollar any more
Who wants to buy a currency that has lost 30% of its value. Asian investors are realising that they are better off diversifying out of the dollar (the Euro has seen more stable and more attractive). The consequence is that confidence in the dollar's prospects are declining and therefore people are buying less and looking to sell.
4. Housing Crisis
Related to the sub prime crisis less people are looking to buy a house in the US. Many existing homeowners are facing repossessions and all these factors combined is causing house prices to fall. Falling house prices have a very negative effect on the economy. When house prices fall people feel worse off and so spend less. The problems in the housing market are very likely to cause a recession. Whilst house prices fall there will be tremendous pressure on the Fed to cut interest rates. Lower interest rates is the best chance of avoiding recession. But, if US interest rates do fall to 1% as some people predict it will cause a further devaluation in the exchange rate.
View more: [http://www.economicshelp.org/blog/predictions/exchange-rate-predictions/]Exchange Rate Predictions at Economics Help.org
Richard Pettinger studied Politics and Economics at Lady Margaret Hall, Oxford University. He now works as an economics teacher in Oxford. He enjoys writing essays on Economic and he edits a site - Economic Help. http://www.economicshelp.org/
Article Source: http://EzineArticles.com/?expert=Richard_Pettinger http://EzineArticles.com/?When-Will-the-Dollars-Decline-End?&id=935307
Tuesday, November 3, 2009
The Dollar Domination
The Dollar Domination
By [http://ezinearticles.com/?expert=Kristien_Wilkinson]Kristien Wilkinson
The US dollar is undoubtedly the prime mover of the world's financial systems. It still remains to be the main currency reserve despite claims of an emerging euro domination. Because of its pivotal role in the global economy, the dollar's value is a matter of concern the world over. Most countries rein in the value of their currencies through their dollar reserves; foreign central banks hold US Treasury bonds; and a majority of the oil cartel's holdings are still in dollars.
In forex markets, the dollar is the most traded currency, figuring in more than 80 percent of all transactions. The euro trails behind and is continually expanding in terms of international reach but forex trading is still primarily centered on the dollar.
The United States emerged as a formidable financial player in the aftermath of World War II, when most of Europe was in shambles. In the 1940s, the Bretton Woods system was established, which obliged each member country to maintain the exchange rate of its currency within a fixed range in terms of gold. This worked well for the US since it had the largest gold reserves at the time. The US poured money into the reconstruction of Europe and also opened liberal trade relations with a lot of countries, thus effectively increasing the stock of dollars in foreign central banks.
Things started going downhill for the US during the 1970s as its gold reserves depleted largely because of the Vietnam War. Central banks, fearing that the American currency was facing an imminent devaluation, started clamoring for gold in exchange for the dollars they were holding. Since the country had insufficient gold reserves, then President Nixon responded by abandoning the Bretton Woods system altogether. This led the currencies to shift to a floating status.
From a legal tender with a measurable equivalent in gold, the dollar became what some economists call a political currency. Its continued use in international trade stemmed from the continued economic, political, and military domination of the United States. Since most financial transactions and commodities, particularly oil, were traded in dollars, the US currency enjoyed a strong demand despite the country's burgeoning trade deficit.
In 2006, the trade deficit reached a record of more than $800 billion. This is more than enough to put any other currency on a disastrous collapse and yet the dollar stays afloat, thanks to the US Treasury bonds and other government assets held by most foreign central banks. In essence, the dollar is supported by foreign borrowing.
However, some economists contend that the deficit is actually helpful in maintaining liquidity in world trade. An $800 billion US deficit means that there is an extra $800 billion circulating in the global economy. If the US were to take drastic steps in balancing its current account, then it would effectively derail the financial movement of international commerce.
The dollar currently suffers from depreciation as other major currencies such as the euro and the yen are getting stronger. Apart from the obvious effects of the trade deficit, this was also brought about by the interest rates cuts of the Federal Reserve, a strategic move to jump-start an economy that threatens to plunge into recession. While this makes foreign importers and tourists happy, the European Union and other export players are bitterly complaining since the depreciating dollar makes their goods more expensive and edges them out of the trade competition.
For how long the United States can keep up with the dollar's weakening value and still convince its creditors to hold on to their T-bonds and cheques is a matter that remains to be seen. In reality though, it will take a long while and an awful lot of economic upheavals before the dollar is dislodged from its current position as the world's most important currency.
Kristien Wilkinson is an online writer and contributor to http://www.forexmarkets.com
Article Source: http://EzineArticles.com/?expert=Kristien_Wilkinson http://EzineArticles.com/?The-Dollar-Domination&id=776878
By [http://ezinearticles.com/?expert=Kristien_Wilkinson]Kristien Wilkinson
The US dollar is undoubtedly the prime mover of the world's financial systems. It still remains to be the main currency reserve despite claims of an emerging euro domination. Because of its pivotal role in the global economy, the dollar's value is a matter of concern the world over. Most countries rein in the value of their currencies through their dollar reserves; foreign central banks hold US Treasury bonds; and a majority of the oil cartel's holdings are still in dollars.
In forex markets, the dollar is the most traded currency, figuring in more than 80 percent of all transactions. The euro trails behind and is continually expanding in terms of international reach but forex trading is still primarily centered on the dollar.
The United States emerged as a formidable financial player in the aftermath of World War II, when most of Europe was in shambles. In the 1940s, the Bretton Woods system was established, which obliged each member country to maintain the exchange rate of its currency within a fixed range in terms of gold. This worked well for the US since it had the largest gold reserves at the time. The US poured money into the reconstruction of Europe and also opened liberal trade relations with a lot of countries, thus effectively increasing the stock of dollars in foreign central banks.
Things started going downhill for the US during the 1970s as its gold reserves depleted largely because of the Vietnam War. Central banks, fearing that the American currency was facing an imminent devaluation, started clamoring for gold in exchange for the dollars they were holding. Since the country had insufficient gold reserves, then President Nixon responded by abandoning the Bretton Woods system altogether. This led the currencies to shift to a floating status.
From a legal tender with a measurable equivalent in gold, the dollar became what some economists call a political currency. Its continued use in international trade stemmed from the continued economic, political, and military domination of the United States. Since most financial transactions and commodities, particularly oil, were traded in dollars, the US currency enjoyed a strong demand despite the country's burgeoning trade deficit.
In 2006, the trade deficit reached a record of more than $800 billion. This is more than enough to put any other currency on a disastrous collapse and yet the dollar stays afloat, thanks to the US Treasury bonds and other government assets held by most foreign central banks. In essence, the dollar is supported by foreign borrowing.
However, some economists contend that the deficit is actually helpful in maintaining liquidity in world trade. An $800 billion US deficit means that there is an extra $800 billion circulating in the global economy. If the US were to take drastic steps in balancing its current account, then it would effectively derail the financial movement of international commerce.
The dollar currently suffers from depreciation as other major currencies such as the euro and the yen are getting stronger. Apart from the obvious effects of the trade deficit, this was also brought about by the interest rates cuts of the Federal Reserve, a strategic move to jump-start an economy that threatens to plunge into recession. While this makes foreign importers and tourists happy, the European Union and other export players are bitterly complaining since the depreciating dollar makes their goods more expensive and edges them out of the trade competition.
For how long the United States can keep up with the dollar's weakening value and still convince its creditors to hold on to their T-bonds and cheques is a matter that remains to be seen. In reality though, it will take a long while and an awful lot of economic upheavals before the dollar is dislodged from its current position as the world's most important currency.
Kristien Wilkinson is an online writer and contributor to http://www.forexmarkets.com
Article Source: http://EzineArticles.com/?expert=Kristien_Wilkinson http://EzineArticles.com/?The-Dollar-Domination&id=776878
Is the Dollar Doomed to Keep Falling
Is the Dollar Doomed to Keep Falling?
By [http://ezinearticles.com/?expert=Richard_Pettinger]Richard Pettinger
Since 2001 the dollar has been in steady decline. Against the £ the dollar has fallen from a low of £1 = $1.45 to close to the £1 = $2 mark. Against the Euro the $ has also depreciated from 0.85 to the present level of 1 Euro to $1.35.
From several perspectives the fall in the value of the dollar appears to be following basic economic fundamentals and whilst these imbalance continue the dollar may continue to fall.
Firstly the US current account deficit is remaining at record levels. The exact amount of debt with the rest of the world is predicted to be around $710 billion for 2006 [1]
Basically this means America is importing more than it is exporting, causing an outflow of money. In recent years this huge level of debt has been bought by countries like Asia who have been happy to buy into the dollar for its perceived status as a “stable and secure” currency. However there is increasing evidence Asian bankers are no longer so confident in the American economy. Thus they are seeking to divest from the dollar and reduce their dollar holdings. As this occurs the dollar will have to fall as there is insufficient buyers of American debt.[2]
Secondly the future for economic growth is no longer looking so positive. Growth forecasts have recently been downgraded. The OECD has downgraded is growth forecasts for the US economy from 3.6% to 2.4%. Pessimists such as Nouriel Roubini, of Roubini Global Economics [2] are predicting a recession in the US by the middle of 2007. An important factor in declining growth forecasts is the falling US consumer confidence.
Related to this is a signal that the previous ebullient housing market may have at last turned the corner. Whilst new house prices continue to rise. The median price of old houses have fallen by 3.5% since last year. Whilst a fall of 3.5% may not sound that much, it is the biggest on record. Also rising house prices have been a key factor in maintaining consumer spending in recent years. The level of personal debt amongst US consumers is at another all time high. The ratio of consumer debt to disposable income has risen from 62% in 1980 to 127% in 2005 [3]
Thus a fall in house prices will have a powerful knock on effect on the rest of the US economy as consumers struggle to refinance and meet levels of debt. Another consequence of this high level of consumer debt is that the US economy will be particularly sensitive to any rise in interest rates. Higher interest rates would be one solution to a falling currency and may be necessary to attract investors to finance America’s trade deficit. Although the prospect of the Fed raising interest rates is remote at the moment. Continued falls in American dollars would cause a rise in the long term interest rates on American secutities.
However some economists argue that prospects for the [http://www.mortgageguideuk.co.uk/2006/12/will-dollar-continue-to-fall.html]dollar may not be as bad as some predict. Firstly as Anatole Kaletsky argues [4] in an era of globalisation and deregulated financial markets, trade deficits are not as difficult to finance as they used to be. Empirical evidence suggests that trade deficits are very unreliable as a guide to exchange rate movements. Firstly one of the few countries with a current account surplus is Japan. Their current account surplus has been growing and yet the Yen is one of the few currencies to have fallen against the dollar. [4]
Secondly although American growth is slowing at the moment it is not doing much worse than the EU and Japan economies. The gap in interest rates between the 2 economic areas is still only about 2%. If there are good reasons for the dollars weakness there are less good reasons for the strength of the EURO. Also some American economists such as Ben Bernanke of the Federal reserve remain optimistic about the state of the US economy arguing growth is only marginally below trend rate.
However it is important not to underestimate the importance of general market sentiment regarding the American economy. Political problems such as in Iraq have to an extent undermined America’s standing as a leader of the World in both an economic and political sense. For 50 years America has been the undisputed global economic superpower, but slowly perceptions are changing that the era of the dollar may becoming to an end. As people switch out of dollars it could create a powerful multiplier effect as investment bankers are reluctant to hold onto their dollar assets.
America to a large extent can’t avoid a period of adjustment as it seeks to deal with its triple deficits, trade deficits with the rest of the world, consumer debt, and US government debt. Whether the period of adjustment is gradual or painful will depend upon 2 things. Firstly how significant will be the fall in US house prices and consequent fall in consumer confidence. Secondly it will depend on the attitude of Asian bankers, in particular the Chinese. Since they hold so many $ assets they may try to manage a gradual devaluation, a continuation of the past 5 years. However if the dollar does lose its status as the reserve currency of the world, there could be a growing stampede as America’s creditors seek to cash in their cheques. This would exacerbate the fall of the dollar, causing real economic hardship for America and the rest of the world.
The only thing for sure is that European consumers are likely to be get some real bargains from shopping in America for the considerable future.
References
[1] http://www.cbsnews.com/stories/2006/01/12/business/main1203762.shtml
[2] http://www.economist.com/finance/displaystory.cfm?story_id=8361260
[3] Available at http://www.federalreserve.gov/releases/Z1/Current/
[4] http://www.timesonline.co.uk/article/0,,630-2485597.html - Demise of Dollar greatly exaggerated
Richard is an economics teacher in Oxford. Richard has written many articles on economics and the UK housing market. He edits a website on [http://www.economicshelp.org/]Economics and updates a blog about [http://www.mortgageguideuk.co.uk/blog.html]economics and mortgages
Article Source: http://EzineArticles.com/?expert=Richard_Pettinger http://EzineArticles.com/?Is-the-Dollar-Doomed-to-Keep-Falling?&id=376469
By [http://ezinearticles.com/?expert=Richard_Pettinger]Richard Pettinger
Since 2001 the dollar has been in steady decline. Against the £ the dollar has fallen from a low of £1 = $1.45 to close to the £1 = $2 mark. Against the Euro the $ has also depreciated from 0.85 to the present level of 1 Euro to $1.35.
From several perspectives the fall in the value of the dollar appears to be following basic economic fundamentals and whilst these imbalance continue the dollar may continue to fall.
Firstly the US current account deficit is remaining at record levels. The exact amount of debt with the rest of the world is predicted to be around $710 billion for 2006 [1]
Basically this means America is importing more than it is exporting, causing an outflow of money. In recent years this huge level of debt has been bought by countries like Asia who have been happy to buy into the dollar for its perceived status as a “stable and secure” currency. However there is increasing evidence Asian bankers are no longer so confident in the American economy. Thus they are seeking to divest from the dollar and reduce their dollar holdings. As this occurs the dollar will have to fall as there is insufficient buyers of American debt.[2]
Secondly the future for economic growth is no longer looking so positive. Growth forecasts have recently been downgraded. The OECD has downgraded is growth forecasts for the US economy from 3.6% to 2.4%. Pessimists such as Nouriel Roubini, of Roubini Global Economics [2] are predicting a recession in the US by the middle of 2007. An important factor in declining growth forecasts is the falling US consumer confidence.
Related to this is a signal that the previous ebullient housing market may have at last turned the corner. Whilst new house prices continue to rise. The median price of old houses have fallen by 3.5% since last year. Whilst a fall of 3.5% may not sound that much, it is the biggest on record. Also rising house prices have been a key factor in maintaining consumer spending in recent years. The level of personal debt amongst US consumers is at another all time high. The ratio of consumer debt to disposable income has risen from 62% in 1980 to 127% in 2005 [3]
Thus a fall in house prices will have a powerful knock on effect on the rest of the US economy as consumers struggle to refinance and meet levels of debt. Another consequence of this high level of consumer debt is that the US economy will be particularly sensitive to any rise in interest rates. Higher interest rates would be one solution to a falling currency and may be necessary to attract investors to finance America’s trade deficit. Although the prospect of the Fed raising interest rates is remote at the moment. Continued falls in American dollars would cause a rise in the long term interest rates on American secutities.
However some economists argue that prospects for the [http://www.mortgageguideuk.co.uk/2006/12/will-dollar-continue-to-fall.html]dollar may not be as bad as some predict. Firstly as Anatole Kaletsky argues [4] in an era of globalisation and deregulated financial markets, trade deficits are not as difficult to finance as they used to be. Empirical evidence suggests that trade deficits are very unreliable as a guide to exchange rate movements. Firstly one of the few countries with a current account surplus is Japan. Their current account surplus has been growing and yet the Yen is one of the few currencies to have fallen against the dollar. [4]
Secondly although American growth is slowing at the moment it is not doing much worse than the EU and Japan economies. The gap in interest rates between the 2 economic areas is still only about 2%. If there are good reasons for the dollars weakness there are less good reasons for the strength of the EURO. Also some American economists such as Ben Bernanke of the Federal reserve remain optimistic about the state of the US economy arguing growth is only marginally below trend rate.
However it is important not to underestimate the importance of general market sentiment regarding the American economy. Political problems such as in Iraq have to an extent undermined America’s standing as a leader of the World in both an economic and political sense. For 50 years America has been the undisputed global economic superpower, but slowly perceptions are changing that the era of the dollar may becoming to an end. As people switch out of dollars it could create a powerful multiplier effect as investment bankers are reluctant to hold onto their dollar assets.
America to a large extent can’t avoid a period of adjustment as it seeks to deal with its triple deficits, trade deficits with the rest of the world, consumer debt, and US government debt. Whether the period of adjustment is gradual or painful will depend upon 2 things. Firstly how significant will be the fall in US house prices and consequent fall in consumer confidence. Secondly it will depend on the attitude of Asian bankers, in particular the Chinese. Since they hold so many $ assets they may try to manage a gradual devaluation, a continuation of the past 5 years. However if the dollar does lose its status as the reserve currency of the world, there could be a growing stampede as America’s creditors seek to cash in their cheques. This would exacerbate the fall of the dollar, causing real economic hardship for America and the rest of the world.
The only thing for sure is that European consumers are likely to be get some real bargains from shopping in America for the considerable future.
References
[1] http://www.cbsnews.com/stories/2006/01/12/business/main1203762.shtml
[2] http://www.economist.com/finance/displaystory.cfm?story_id=8361260
[3] Available at http://www.federalreserve.gov/releases/Z1/Current/
[4] http://www.timesonline.co.uk/article/0,,630-2485597.html - Demise of Dollar greatly exaggerated
Richard is an economics teacher in Oxford. Richard has written many articles on economics and the UK housing market. He edits a website on [http://www.economicshelp.org/]Economics and updates a blog about [http://www.mortgageguideuk.co.uk/blog.html]economics and mortgages
Article Source: http://EzineArticles.com/?expert=Richard_Pettinger http://EzineArticles.com/?Is-the-Dollar-Doomed-to-Keep-Falling?&id=376469
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