Global Perspectives: Weighing in on the depreciating Dollar debate
Natalia Rivera
Issue date: 10/27/09 Section: Opinion
Essentially, if the American economy crashes, so will China's, consequently turning an already unbearable global financial crisis into a global depression.
China may eventually consider diversifying its basket of currencies, but at a very gradual pace.
Although the international community is diligently working to provide potential alternatives to the American currency -- such as the euro -- the dollar's international dominance has not disintegrated.
Despite the negative effects of the financial crisis, domestic and foreign investors have looked to the market of U.S government debt securities, the most liquid market to date, for financial security. That said, the demand for U.S. Treasury bonds still remains strong because they are the most liquid government bonds in the world.
In order to facilitate trade and financial transactions, foreign investors need currency that can be easily converted into cash and the dollar, of course, is the best and in many cases the only option for this kind of economic activity.
The euro is the second best option, but the heterogeneity of European-governments' debt securities, due to varying economic situations within the European Union, adds to the euro's riskiness and differing degrees of liquidity.
On a more domestic level, the depreciation of the dollar would actually help reduce the current budget deficit.
A weaker dollar means the U.S. exports are more affordable to foreigners and foreign imports are more expensive to Americans.
Consequently, both domestic and foreign consumers would favor purchasing cheaper American products, thus driving up the demand for the dollar. As the demand for the dollar increases, the supply of the dollars decreases, meaning that the value of the dollar will eventually appreciate.
When the dollar appreciates, the U.S. will regain its competitive advantage, perhaps not as notably as in the past, but its economic position will nonetheless remain unchallenged, at least for now.
As a result of the financial crisis, emerging markets are eager to reduce their dependency on the American economy.
However, the international community has failed to provide credible alternatives to the dollar, at least for the moment. International markets will eventually adjust to the declining dollar, just not in the near future. Â Â
China may eventually consider diversifying its basket of currencies, but at a very gradual pace.
Although the international community is diligently working to provide potential alternatives to the American currency -- such as the euro -- the dollar's international dominance has not disintegrated.
Despite the negative effects of the financial crisis, domestic and foreign investors have looked to the market of U.S government debt securities, the most liquid market to date, for financial security. That said, the demand for U.S. Treasury bonds still remains strong because they are the most liquid government bonds in the world.
In order to facilitate trade and financial transactions, foreign investors need currency that can be easily converted into cash and the dollar, of course, is the best and in many cases the only option for this kind of economic activity.
The euro is the second best option, but the heterogeneity of European-governments' debt securities, due to varying economic situations within the European Union, adds to the euro's riskiness and differing degrees of liquidity.
On a more domestic level, the depreciation of the dollar would actually help reduce the current budget deficit.
A weaker dollar means the U.S. exports are more affordable to foreigners and foreign imports are more expensive to Americans.
Consequently, both domestic and foreign consumers would favor purchasing cheaper American products, thus driving up the demand for the dollar. As the demand for the dollar increases, the supply of the dollars decreases, meaning that the value of the dollar will eventually appreciate.
When the dollar appreciates, the U.S. will regain its competitive advantage, perhaps not as notably as in the past, but its economic position will nonetheless remain unchallenged, at least for now.
As a result of the financial crisis, emerging markets are eager to reduce their dependency on the American economy.
However, the international community has failed to provide credible alternatives to the dollar, at least for the moment. International markets will eventually adjust to the declining dollar, just not in the near future. Â Â
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