The WSJ’s daily Asia news alert features a story with the headline: FALLING DOLLAR NOT SO OMINOUS: Though the falling dollar has led many to believe inflation is imminent, research suggests that the dollar does not drive U.S. inflation like it used to.
Abstract:
When the dollar weakens, instead of raising the price of imports, foreign exporters are so eager to keep U.S. market share that they will often lower their prices to keep them constant after the currency effect.
Because of this, the U.S. Federal Reserve can often lower interest rates without worrying as much about inflation.
Keep in mind that higher input costs, especially oil, can prove problematic for all stakeholders since exporters’ margins will be under even greater pressure (compelling them to pass on higher prices), while it will become increasingly difficult to fight domestic U.S. inflation, even for those who argue it is under control when excluding oil and food.
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1 admin // Nov 19, 2007 at 10:45 am
Here’s a great excerpt from an article in the latest print edition of The Economist, “America’s vulnerable economy”:
The rising importance of the world’s new giants [BRICs] will not only boost growth. It will also shift relative prices, notably those of oil and the dollar. And the consequences of this will be less comfortable for developed countries, especially America.
The oil price has risen mainly because of strong demand in emerging economies, which have accounted for as much as four-fifths of the total increase in oil consumption in the past five years. In past American recessions the oil price usually fell. This time it is likely to hold up. That will not only hurt the finances of Western consumers, but may also make the jobs of their central bankers harder, by combining inflationary pressure with economic slowdown.
The enfeebled dollar—lately in sight of $1.50 to the euro—would be weaker still without enormous purchases by central banks in emerging economies. This support is now waning. China and others are putting a smaller share of increases in reserves into the American currency. And Asian and Middle Eastern countries with currencies linked to the dollar are facing rising inflation, but falling American interest rates make it harder to tighten their own monetary policy. They may have to let their currencies rise against the sickly greenback, meaning they will need to buy fewer dollars. More important, as international investors wake up to the relative weakening of America’s economic power, they will surely question why they hold the bulk of their wealth in dollars. The dollar’s decline already amounts to the biggest default in history, having wiped far more off the value of foreigners’ assets than any emerging market has ever done.
The vigour of emerging economies is good news for the world economy: for its growth, it has much less need of a strong America. The bad news for America is that this, in turn, may mean that the world also has less need of the dollar.
2 admin // Nov 19, 2007 at 10:47 am
How about this teaser from an AP article on OPEC being interested in a non-dollar currency:
Iranian President Mahmoud Ahmadinejad said Sunday that OPEC’s members have expressed interest in converting their cash reserves into a currency other than the depreciating U.S. dollar, which he called a “worthless piece of paper.”
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