Bellerbys Economics - Mr Stephenson

Friday, May 19, 2006

Dollar Falls

So as we predicted last week, the dollar has fallen by about 5% during the week. What are the implications of this?

Well, for one thing, it means the real value of US wages has just fallen by 5%. It will take a while for US workers to realise this but it will soon become clear through higher import prices. Unfortunately, this is also inflationary and it already looks as though the Fed may be thinking of raising interest rates again - with the usual consequences from that of reduced demand and investment in the future.

On the plus side for the moment, the fall in the dollar has reduced the trade gap as export prices have become relatively cheaper and US industrial production has therefore increased - jobs are up - but not for long! (see above)

For the rest of the world, the fall in the dollar has been a bit of a blow - especially China, Korea, Germany and Japan - all of whom have built up huge dollar reserves - the value of these has just fallen by 5%. So not only was China selling products cheaply to the US through a low exchange rate - but now they've just lost another 5% on the deal. Hmmm...difficult that one. Probably still worth it (American dollars still flooding into China - but not quite as good a deal as they thought)

Also, it will get a little tougher now to sell to the US - the world's biggest market. Perhaps it's time businesses started looking for markets elsewhere - in the long term, a less monocentric world economy will be a good thing.

But it's not over yet. Venezuela has just announced it will only trade oil for euros - like Iran did last month. As more countries move away from the dollar standard for oil trading, there is less need for central banks worldwide to hold the dollar, reducing demand further. And the US stupidity at refusing Dubai Ports the chance of buying some US ports has recently in a substantial chunk of Arab investment looking elsewhere - also reducing demand.

It may just be that we are at a significant turning point in the world economy.


  • Perhaps:

    will have your interest

    Terese Wahnloop

    By Anonymous Anonymous, at 9:04 am  

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