Finance Weblog: The dollar slide - Instituto de Empresa Business School

Noviembre 14, 2007

The dollar slide

Juan Toro

Dollars is sliding down quickly against most currencies. The direction of the trend seems undisputed. This depreciation has been praised for long, as it helps correcting the huge US current account deficit. However policymakers worry about a disorder depreciation with sharp dollar movements. Policymaker prefer an orderly unfold of events as Fukuda verbally claim early this week in relation to his own currency: “It is fine if you want to buy yens but please do not rush”. Well known reasons explain the dollar downward trend: a) an enormous current account deficit; b) a different monetary policy cycle compared with other large economies; c) recent turmoil in US financial markets.
Since the start of this trend some other events have pushed the trend further. Among these events some are worthwhile stressing. First, recent statements raised by China monetary authorities have pointed out that they would like to keep their reserves in a wider set of currencies not just in dollars. This could (or already has) trigger a sell off from their side. Second, recent comments from the governor of the Central Bank of United Arab Emirates have stressed that the peg to the dollar might not be a right policy for the future given the dollar weakness. After this statement, other Gulf States with a pegged currency to the dollar, might also consider revising their current exchange rate agreements. This second reason is also linked to the potential vicious cycle that might be created by a depreciating dollar and continuously higher oil prices. Persian Gulf countries, given the dollar weakness, might invest the reserves of current high oil prices into other currencies, pushing the dollar lower relative to these new chosen currencies.

So much for explanations about the dollar slide, but is there anything that the Fed or US Treasury might do? Well most probably not if the depreciation is smooth. This new depreciation is helping to correct some imbalances (US current account) and though some inflationary pressures might build up, so far they are of little concern. So as long as this depreciation helps, nothing will be done, and as Bernanke said, in a mid term horizon they support a sound dollar. But that is just in the mid term horizon.

Posted on 14 Noviembre 2007 in Financial Markets

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The slide of the dollar might be bad for you, but I am feeling a bit lucky as I plan to go to the USA in 2008 for my graduation!

Otherwise I might spend (relatively) less money in the USA.

Posted by: Geld Lenen at Diciembre 3, 2007 10:04 PM

You might soon have other potential destinations as the euro streghten not just against the dollar

Posted by: Juan at Diciembre 6, 2007 05:22 PM

Would be nice to get an update on your vision! For me as an exchange student in the States now, life is becoming cheaper but I understand the US concerns...

Also concerns in EU for an euro to is coming TO expensive.

Posted by: geld lenen at Marzo 10, 2008 09:51 PM

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