Falling Dollar and slowing US Economy

User techy246 from our now defunct economics forum posted this question that had a few responses. We’re reposting it here in the blog for your view.

1. Since Europe exports to usa a lot, how can they let their currency keep going up?….is it possible that they are not using USD as the currency of trade but EURO instead??

2. from everything i am reading, even though nothing is for sure right now, it looks like the USD is going to fall atleast 30-40%. and at the same time FED will have to decrease interest rate to support the slowing economy.

lets say slowing US economy leads to:
1. high unemployment, wage decrease
2. decreased consumer spending (leading to worse economic conditions)
3. lower interest rates (falling USD)
4. Slowing china/india economy because of decreased exports

in the previous downtime in 2001, they decreased the interest rate, and people kept spending by borrowing from the equity of their home….i wonder what will bail us out if things go south this time??

one more thing i am not able to understand, how can the stock market keep ignoring things??

isnt the analysts 10 times more knowledgeable than layman like me, or is it possible that all the doom reports are false??

i think if the economy starts to go down…..stock market will go down atleast 20%

6 comments

  1. In Reply To
    I am back again with similar question.

    1. Since Europe exports to usa a lot, how can they let their currency keep going up?….is it possible that they are not using USD as the currency of trade but EURO instead??

    Europe adopted the EURO so they wouldn’t have to use the USD as their vehicle currency. So you are right, the vehicle currency (the popular one) in European trade is the Euro.

    2. from everything i am reading, even though nothing is for sure right now, it looks like the USD is going to fall atleast 30-40%. and at the same time FED will have to decrease interest rate to support the slowing economy.

    30-40% would be absolutely huge. That would be a massive recession bordering on depression. I don’t think it will be that must of a fall. The FED may decrease at some point merely to increase spending.

    lets say slowing US economy leads to:
    1. high unemployment, wage decrease
    2. decreased consumer spending (leading to worse economic conditions)
    3. lower interest rates (falling USD)
    4. Slowing china/india economy because of decreased exports

    in the previous downtime in 2001, they decreased the interest rate, and people kept spending by borrowing from the equity of their home….i wonder what will bail us out if things go south this time??

    I doubt it, you have to remember a major reason for 2001 was both the crappy economy and 9/11. Consumer confidence was at an all time low so no spending was happening regardless of the interest rate.

    one more thing i am not able to understand, how can the stock market keep ignoring things??

    isnt the analysts 10 times more knowledgeable than layman like me, or is it possible that all the doom reports are false??

    i think if the economy starts to go down…..stock market will go down at least 20%

    The stock market tends to reflect economic slowdowns in advance of any monetary policy changes in the economy. Tends to , not always. Furthermore, stock markets are generally short term, many very short term. Most macroeconomic policies are meant for medium to long term. Generally (interest rate reductinos are usually lshort term but effects are longer.)

  2. if i am not wrong dollar has already fallen more than 30-40% against most currencies except for some like japan-yen, china-yuan and indian-rupee……since these currencies are managed by their governments wrt to USD.

    why would USA go into recession if dollar falls another 30-40%…….dont they buy most stuff in dollars?? that means it does not affect their export in the short term……..and in the long term its going to help their domestic manufacturing.

    and they will be able to export more (example boeing is more competitive htan airbus because of cheap dollar compared to euro)

    it will lead to massive inflation….in the long run..

  3. If the dollar continues to drop yes exports become cheaper to those importing because they can purchase more American goods for the same amount of domestic currency. Problem, imports now becoming more expensive. Furthermore, foreign investment continues to dwindle since nobody wants to hold a depreciating dollar.

  4. The dollar isn’t fine, it’s being choked to death by the mountain of debt behind it. The USD will only be fine when the US economy picks up and debt decreases. There’s no imminent collapse, but the strength is certainly depressed.

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