It seems like every time in the past few years I’ve ventured over to CNN Business or TIME Money, there are headlines about the decline of the dollar, the rise of inflation, and the competition between the dollar and the euro. Understandably, Americans worry about their currency slipping, and the rest of the world can’t help but take note. The dollar isn’t just important for Americans. It has global influence and importance. If the dollar continues on its downward slope, then it makes American exports more competitive with cheaper, foreign-made products, which is good for the US economy; however, being that most countries have conducted the majority of their international transactions and kept reserves of US dollars opposed to their own currency or other strong currencies (like the euro or the increasingly strong RMB), the lowering of the dollar’s value poses issues both in the US and abroad.
Besides worries over the dollar’s stability as a reserve currency and ability to stand against inflation, challenges currently facing the dollar include the present trend toward investing in commodities such as oil rather than the US dollar (which, since the two are tightly linked, results in a rise in oil prices as the dollar falls), the relationship between the dollar and food prices (as the dollar’s value decreases and more people invest in food rather than currency, it costs much more for developing countries to buy food products, which results in hunger spiking dramatically), and the issue of whether or not China should be pressured via trade restrictions to revalue its currency (it’s good for China to keep the RMB weaker than the dollar because it keeps the world buying Chinese-made goods, but the US says it’s unfair for China to keep their currency a jump lower than the dollar when the dollar is falling).
These concerns about China coordinate well with a TIME Business article published only a few days ago, which discusses a prominent economist’s belief that it is foreign investors that have caused the major problems in the US economy. The article doesn’t discuss the dollar’s position, but rather the surrounding economic tensions between countries, including those which the original article cited as helping to drive the dollar down. For instance, China purchased large amounts of US Treasury bonds, which “push[ed] down yields and [made] Treasuries less attractive to other foreign investors,” eventually resulting in the financial meltdown the US has been weathering for some time now.
According to an article in New York Magazine back in 2005, James Cramer takes an alternate view and lists positive outcomes of having a weaker dollar. His take is that a weaker dollar (provided China revalues its currency as discussed above) would result in Americans buying American far more often, as they might be unable to afford the alternative, and this would help the US economy and stop us from importing (and thus depending) quite so much on other countries. He recommends buying gold as a solid monetary investment (since Nixon cut the dollar-gold link in the 70s, there is no reason the price of gold can’t absolutely skyrocket), investing in Canadian real estate and oil resources, investing in US companies that export goods internationally, and investing in M&A companies. While readers must remember that some of this is quite dated—no reason to buy Canadian real estate when the real estate market here is so terrible), much of it relates closely to the original article; for instance, the link between oil and the dollar still holds true.
CNBC recently published a piece dealing with the way gold is rising as the dollar falls against the euro. Spot gold apparently rose nearly $8, to $1,136.80 per ounce. Simultaneously, the euro hit its high against the dollar, and oil prices fell to their lowest price this month. Experts say that they expect gold to continue rising in value unless the dollar “rallies,” which would lessen the attractiveness of gold as a stable investment, since dollars have been the primary stable investment for decades, and it would be easy to switch back. I thought it was interesting that oil went down; I’m not actually sure what’s going on there. Then again, the original article did make the point that the oil-dollar link was not perfect and did not always follow a simple correlation.
Personally, I feel that the dollar won’t go out of fashion quite yet; the US may be on its way out as THE major economic power, but it’s still absolutely one of the most powerful countries in the world. The exchange rates against the dollar are certainly not what they used to be. However, that doesn’t exactly make us a poor country, or a country in need of piggybacking on another country’s currency, or a country with no global influence. I don’t know how the rest of the world will view the dollar in the future, or if the euro or the RMB will replace it as the international stock money, but the dollar will exist, and it will be good enough for the US, at least.
(Note: Please keep in mind that, although I carefully read the main article and all of the secondary articles, I am really not familiar with matters of finance, so any speculation or assumption I make here could be wildly off.)
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