Amidst
the burgeoning US trade and budget deficits and waning investor
confidence in the US bonds and stocks, the dollar has been
losing its value against a blend of worldwide currencies,
after having gained value throughout 2005. The decline got
momentum since April 21, 2006, when the G7 nations declared
that they wanted Asian countries to allow their currencies
to be strengthened in order to reduce their growing trade
surpluses with the rest of the world. Accordingly, the dollar
has been losing its status as the world's major currency.
The dollar broadweighted trade index has fallen by 18% since
February 2002. Besides, the recent tax cuts and Iraq war have
caused the US an external debt of over US$2.5 tn. As against
this, the rest of the world was subsidizing the world's major
economy at a rate of more than $50 bn per month by 2005.
Nevertheless,
policy makers in the US have largely ignored the issue and
their policy of "nonintervention" may prove to
have risky consequences, not only for their economy but also
for the entire dollartied global economy. Most foreign investors
channelize their money into the US because it is a great investment.
But the question now is: With the falling dollar's value,
is the US still a safe haven for the investors? Nowadays,
amassing money in the US is not all that compelling a deal.
Foreign investors may soon demand higher interest rates in
order to keep their money flowing into the US. Financial experts
predict the dollar to depreciate further this year, especially
against the Japanese yen and other Asian currencies. Though
the weakening dollar doesn't augur well for the longterm
bonds of foreign investors, it could start eliminating the
huge imbalances that have built up in the US trade accounts,
which will in turn be a good sign for the US economy. On the
other hand, the IMF has declared recently that the dollar
will have to depreciate "significantly" over the
mediumterm if global economic imbalances are to be resolved
in an orderly fashion.
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