DiscussEconomics

How is a falling US Dollar related to the US Economy?

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A user techy246 posted this in the forum at the end of 2006. We’re now moving it here.

I am trying to make sense of all the talks in media about a recession in 2007 and falling usd.

so right now dollar is in a bad position because:
1. huge trade and fiscal deficit..being funded by china and others….who dont want any more usd
2. slowdown in economy and housing which means interest rates has to be lowered.
3. people moving out of investment to some other country

to keep the dollar strong, FED will have to increase interest rates….but thats almost impossible because it will kill the already weak housing sector and the economy.

that means i am betting that FED will decrease interest rate in second quarter of next year….to help the economy……and it will let the dollar fall……..am i right??


i am also trying to think the damage of falling dollar
1. increased cost of import………but thats going to be a plus since it will increase local manufacturing…
2. falling dollar is also going to reduce debt by the same percentage…..so thats also a good thing…

can someone list the negatives of falling dollar in US economy?

6 responses to “How is a falling US Dollar related to the US Economy?”

  1. barry econ Avatar
    barry econ

    Also think of the markets, this is huge component of investment (GDP).

    If the dollar falls that means US exports become cheaper and the manufacturing sector will benefit. This also means tourism will increase because the foreign currency will appreciate versus the American dollar. It also means US investments, bonds, short term and longterm, are not as desirable because the interest rate has declined. That means the demand for US dollars will decrease even further. If demand decreases that means supply stays the same, or increases (since less people want the dollars), and the price will decrease as well. The US investment tools (I.e. bonds, treasury bills) will also decrease in price to reflect this demand.

    That’s one way to look at it.

    Reply
  2. techy246 Avatar
    techy246

    so the disadvantage of falling dollar will mean that foreign investment will dry up.

    but i am sure thats not going to be a cause for shortage in liquidity…..interest rates will be down and one can borrow from fed to invest in the markets……and since exports will be up it can be quite a bullish market…

    one thing for sure….it can be a win-win situation for USA….all these days their economy grew because of credit from other countries…….and now with falling dollar they have to pay less……

    and then their products will also become competitive in global market……that will be a big boost to american auto industry…

    i wont be surprised if the fed lets the dollar fall to oblivion…..and they just take care of domestic economy by cutting the interest rate……who needs foreign investment if you can print your own money……manufacture your own goods and consume them……a complete self sufficient cycle.

    Reply
  3. barry econ Avatar
    barry econ

    NOt quite. Foreign investment will never dry up, it will just fall. Big projects may suffer because of the dollar. Banks need to get their money from some place, and you can’t just print more. Falling dollar is not win win. You’re goods may become less expensive and therefore exports increase, however, imports decrease since foreign goods are more expensive.

    Printing more money doesn’t help anything. You need demand to accompany that increase. If you just increase the MS for kicks you’ll end up decreasing the interest rate even more to get rid of hte excess supply. In turn inflation will go through the roof.

    Reply
  4. techy246 Avatar
    techy246

    i beg to differ….unless everything i am reading is wrong…

    from what i have read, the us central bank has been printing money without any gold standards since last 30-40 years, which means that they can print as much as they want……right?

    of course inflation is going to go through the roof if imports become expensive and money becomes excessive…….but if i am not wrong USA has so much debt that its a positive since they have to pay less…..and with the deflated dollar….its even better…..

    only people suffering will be those with savings/investments……because their money will lose its value..

    Reply
  5. barry econ Avatar
    barry econ

    There are rumours that the Fed is artificially trying to keep the dollar low so they don’t pay as much on debt like you said. However, the connection you have made between the gold standard and printing money doesn’t quite work.

    You can’t just print money or inflation will go through the roof. There is a heavy component of responsibility when you just print money. Think about it, without proper backing in interest rates (monetary policy) what good does it do to just print a billion dollars? If you give everyone in the States 1 million dollars does that make everyone better off? Look up ‘purchase power parity’ and perhaps even the ‘fisher effect’ for more info.

    Reply
  6. Grant Avatar
    Grant

    Would the ‘liquid credit’ created by the banks contribute to inflation?

    Reply

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