Will America and the world pay a painful price for a delayed drop in the Dollar?
*The Economist, November 30, 2006
“A further drop is likely as the American economy slows
The dollar’s tumble this week was attended by predictable shrieks from the markets; but as it fell to a 20-month low of $1.32 against the euro, the only real surprise was that it had not slipped sooner. Indeed, there are good reasons to expect its slide to continue, dragging it below the record low of $1.36 against the euro that it hit in December 2004.
The recent decline was triggered by nasty news about the American economy. New figures this week suggested that the housing market’s troubles are having a wider impact on the economy. Consumer confidence and durable-goods orders both fell more sharply than expected. In contrast, German business confidence has risen to a 15-year high. There are also mounting concerns that central banks in China and elsewhere, which have been piling up dollars assiduously for years, may start selling.”
“If a steady slide in the dollar would be good news, a sharp plunge as investors take fright and run would be another matter. That could increase risk premiums and unnerve frothy financial markets around the world. A tumbling dollar would also add to inflationary pressures in America and so make it harder for the Fed to cut interest rates to cushion a collapsing housing market (Mr Bernanke gave warning this week that inflation remains “uncomfortably high”). Both America and the world would then pay a painful price for the long-delayed drop in the dollar.”
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