By now, we are all very familiar with the bad news of the depreciation of the dollar. The US currency has been in constant decline against a basket of major currencies. For consumers, this means that trips and vacations abroad are now more expensive and imported products also cost more. With the severe situation of the current economy, it seems nothing more than wishful thinking when we say that the US dollar is about to recover. After all, the country still runs a growing trade deficit, demand for the dollar weakens as investors turn to stronger currencies like the euro, and there is still a chance that the Federal Reserve will implement more interest rate cuts. to boost the economy.
However, some market experts and economists say that the dollar has almost finished serving its sentence and is about to rise again. With the previous cuts that the feds have instituted, it is now considered highly unlikely that Ben Bernanke and the gang will employ another steep cut. A quarter point cut is the highest it would go, market watchers theorize. If the economy starts to recover in the latter part of the year, interest rates would eventually go up. With higher rates, we will end up with a much stronger currency. Some are hoping that the European Central Bank will cut its own rates to counter the strength of the euro and keep EU products competitive, but this is highly unlikely as of now.
Another incentive for the Federal Reserve to boost the appreciation of the dollar is inflation. Prices of raw materials are skyrocketing and filling a tank with gasoline is getting more and more expensive. The feds may want to keep rates low to prevent the economy from completely crashing, but they will also have to make sure we don’t end up with uncontrollable inflation. There have also been fears of stagflation, a situation in which the economy does not grow and prices skyrocket. It sure is a tough balancing act for the feds.
Some also say that the weak dollar is actually doing the country good. It keeps export prices low and therefore more competitive. In fact, the worrying fall of the US currency has led several EU leaders to complain that this creates a huge disadvantage against European products. A depreciating dollar is also said to reduce the country’s trade deficit, which at one time was more than $ 800 billion. Although there is some truth to this statement, the overall costs still outweigh the benefits by a significant margin. For one thing, the United States certainly doesn’t export as much as it imports. The country is largely a consumer society, absorbing much more than it can afford, so a weak dollar would mean that spending on imports far exceeds the gains that can be made from more competitive exports.
The continued depreciation of the dollar did more than make a Bordeaux wine more expensive, it has also eroded the image of what was once thought to be the most powerful currency in the world. Several countries are considering switching to the euro as their main foreign exchange reserve. It was also previously reported that a new oil exchange would be established in which oil and gas will be traded in currencies other than the dollar. Of course, a global change in the reserve currency certainly won’t happen with a flick of the finger. In any case, it will be a long, arduous and very painful process not only for the United States but also for most national economies.