The Economist looks at the sinking dollar
Last week we highlighted a package of stories on the US real estate crisis from Britain’s The Economist; this week the magazine has another strong pair of US economy features, on the repercussions of the US dollar’s plummeting value:
“If the dollar’s decline has accelerated of late, that is largely because of the cyclical divergence between America’s economy and the rest of the world…. But economic fundamentals are not all that is hurting the dollar. The currency is also suffering because the credit mess is concentrated in dollar assets. Investors’ conviction that transparent markets and vigilant regulators make America a safe place to store money has taken a battering from the revelations of recent weeks. Net private capital inflows into America seem to have evaporated since the credit turmoil began. The subprime crisis has tarred the dollar as a subprime currency.”
“Losing faith in the greenback”
The dollar… faces a nasty squall that combines both cyclical and structural blasts. Its decline in the past five years has imposed a huge capital loss on foreign-exchange reserves. If this becomes too painful, central banks may be tempted to cut their losses and dump their dollars, causing a slump in the currency’s value…. America’s thirst for overseas funding is another reason to fret. For years it has spent more than it earns, running up large, persistent current-account deficits. Last year the shortfall in America was a whopping 6% of GDP. Bridging that gap requires foreigners to buy dollar assets—bonds, stocks or property. But the more overseas debt that America runs up, the greater the risk that it will partly default on its obligations, either through currency weakness or inflation.”
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