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July 12, 2007

The Falling Dollar

As Anatole Kaletsky points out, currency rates are not quite as simple as people seem to think. High does not equal good (necessarily).

Yesterday, the pound and the euro hit their highest levels in a generation against the US dollar. The dollar, meanwhile, collapsed to a record low against an average of all the world’s major currencies. It is tempting to interpret the flight from the dollar in financial markets as the clearest, most objective, indicator of America’s relative decline.

Me, I'm terribly simplistic (simple even) about such things. The US has a huge trade deficit. A falling dollar will (after some stutters due to the J Curve) help to close that. Excellent, carry on chaps.

July 12, 2007 in Economics | Permalink

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Comments

Nobody really understands currency markets, but as fixed-exchange rate systems have been tried many times and have usually failed (as defined), all we can do is go with floating exchange rates, the "least-worst" options, and hope for the bset.

Posted by: Mark Wadsworth | Jul 12, 2007 11:02:18 AM

Not mentioning the fact that it keeps the price of oil in non crash territory.

However, a strong currency does not actually mean your deficit will grow. To hope that you can close your trade deficit with a weak currency is only taking a temporary easy way out.

Witness the German Mark who always appreciated vs the pound and the franc, and still they sell their wares everywhere.

Which make the Germans generally richer.

Posted by: Pascal | Jul 12, 2007 1:48:25 PM

At what point does the dollar sink low enough for all those countries bankrolling the US to pull the plug though? Never? We shall see.

Posted by: Barry Bethel | Jul 12, 2007 2:16:28 PM

Keep fantasizing, Barry.

Posted by: Chris | Jul 13, 2007 12:27:36 AM