What happens if the dollar falls much further?

[lord of the mark]

Originally posted by Victor Galis


Why would buy American bonds if the dollar is falling? The interest on the bonds won't cover their losses from the falling currency.

IF they expect a fall in the currency, then ceteris paribus, they should be more reluctant to buy dollar denominated assets. Of course. So the implicit assumption must be that a fall in the economy leads to a fall in the currency. But why should that be? A fall in the economy, interest rates aside, should strengthen the currency, since when the economy falls demand for imports will fall.

[senowen]

Originally posted by LordShiva
I've heard of Brits flying over to New York for a weekend to shop, as it's cheaper than going to Harrod's.

Well, I for one can tell you that I hear a lot more British accents now than I did a five years ago. I work near Chinatown, and almost every day I get asked for directions by some lost Brit tourist.

[dannubis]

Well, for non USians it keeps the oil prices down too...

I think it is about time we let the euro drop a notch or two in value though.

[LordShiva]

Originally posted by lord of the mark
A fall in the economy, interest rates aside, should strengthen the currency, since when the economy falls demand for imports will fall.

That's just one of the forces affecting the dollar.

But when foreign governments start moving their dollar holdings into another currency, it would exert negative pressure on the dollar.

[lord of the mark]

Originally posted by LordShiva


That's just one of the forces affecting the dollar.

But when foreign governments start moving their dollar holdings into another currency, it would exert negative pressure on the dollar.

yes it would.

But thats not what im challenging. The article appears to suggest that a slowdown in the US economy, would, ceteris paribus, tend to weaken the dollar. Which, IIUC, is exactly the opposite of what a slowdown does to a currency. Now maybe hes not speaking ceteris paribus - maybe he thinks a slowdown would lead to renewed fiscal stimulus - but he doesnt say that.

[Bill3000]

To think that I remember the day when the dollar was actually worth more than the euro.

[LordShiva]

Originally posted by lord of the mark
But thats not what im challenging. The article appears to suggest that a slowdown in the US economy, would, ceteris paribus, tend to weaken the dollar.

I didn't read that as the point of the article. It wasn't the slowdown itself that's putting pressure on the dollar; rather, real economic growth evidently differed sharply from expectations. So, conceivably, the effect of the delta between expected and real growth could affect fixed asset yields enough to outweigh the effect of shrinking the trade deficit.

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 (see article). 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.

Ben Bernanke, chairman of America's Federal Reserve, sounded unperturbed this week, suggesting that the economy will enjoy a soft landing (which would argue that interest-rate cuts are not imminent). This notion has underpinned the belief that the dollar will hold up because foreign investors will remain eager to buy dollar assets and so finance the country's vast current-account deficit. But if the economy slows more sharply than expected, their enthusiasm for the greenback will shrink. And if house prices continue to fall, the risk of a recession will grow.

[Nikolai]

Originally posted by Bill3000
To think that I remember the day when the dollar was actually worth more than the euro.

That day was long ago, you must have a good memory.

[DanS]

Originally posted by BeBro
So do the good times roll or not?

We're doing pretty well.

There's nothing wrong with you Euros buying American for a while.

[Bill3000]

Originally posted by DanS


We're doing pretty well.

There's nothing wrong with you Euros buying American for a while.

That's a good method of measuring how strong the economy is?