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Sunday, December 03, 2006
The Falling Dollar
Gerard Baker points out that In the last five-years, the US currency has fallen by about 18 per cent against those of its main trading partners. This seems to have been driven in large part by America’s indebtedness to the rest of the world. The US is running a current account deficit of roughly $800 billion, or about 7 per cent of its total national output. He does not think that this means the American economy is doomed. He is right in pointing out that the exchange rate merely reflects the changing premium that investors demand for investing in the US. Investors may have grown more concerned about placing their money in the US in the past year, especially as European and Japanese performance has improved and that this simply means they demand a lower price for investing there to protect them against further dollar depreciation. The dollar surely needs to keep on falling. What matters is that its drop is an orderly and stable one, not a sudden collapse – that may hurt China, the most important trading partner of the US with a trillion dollar in surplus most of which are invested in dollar/dollar denominated financial instruments!!
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