The Decline of the Dollar

“From now on, I will only sign contracts in euros because today, we never know what can happen to dollar.” These words were pronounced one week ago by the world’s nÐ'o1 top-model Gisele BÐ"јndchen. Does this reflect an unfounded rumor fear and rumor or do we really have reasons to start worrying about the future of the most reliable currency ever?

The dollar fell to $1.41 per euro on September 25th. As the its decline gathers pace, understanding what are the reasons to it and what will its consequences be for the international economy seems to be a crucial issue. In order to answer to this question, we will base our judgment on 3 articles taken from The Economist, The Time magazine and the Financial Times.

First, we will expose the real reasons of the decline of $US. And in a second time, we will see what outcome is to be expected for the rest of the world economies.

To begin with, let’s explain why the dollar has grown weaker. It doesn’t stem from the hypothetical fact that the United State’s economic prospects could have dramatically deteriorated. Nor can we attribute the dollar’s drop to the usual fluctuations of currency markets due to speculation.

The Time magazine puts forward the idea that the root problem involves the countries which economic prospects have greatly improved in relation to those of the dollar but which currency has remained weak. China is the first example that comes instinctively to our mind. However, Saudi Arabia and it’s Persian Gulf neighbors as well as Japan must also be taken into account in this issue.

These countries export much more than they import to the US and therefore they found themselves with huge amounts of dollars. What do they do with them? There remains the problem. They buy U.S. Treasury bills. Hence, this selling of dollars is the main cause of the currency weakening.

Since this configuration can’t go on forever, the Time Magazine emphasizes the fact that the adjustment that is about to come might be even more messy than was the transition, from Bretton Woods to the freely floating currencies system.

This pessimistic view of the future brings us to another aspect of the debate. According to the Economist, some of this fear is exaggerated. Many worry that official investors and central banks very linked to the stumbling currency start dumping their dollar assets, which would only worsen the situation. But The Economist points out that a change of currency peg from oil exporters for instance, doesn’t necessarily mean that the central bank of the country will suddenly sell all its dollars.

Now that we’ve separated the main cause from the overdone threats, we can try to foresee what consequences the dollar drop will bring for the US and the international economy.

A dark scenario looms on the horizon for America and the greatest fear deals with the fact that the declining dollar may boost inflationary pressure in the United States and therefore, restrict the Fed’s ability to cut interest rates further.

The Economist tries to nuance this idea by citing three economists at the Federal Reserve. According to them, there’s nothing to worry about, yet : the inflationary risk is still little since countries are more willing to absorb a rising exchange rate when exporting to the United States because they value their share of America’s enormous market and want to protect it. Nevertheless,