Dollar on the Rebound?

By: Kristien Wilkinson

By now, we're all too familiar with the bad news of the depreciating dollar. The US currency has been on a steady decline against a basket of major currencies. For consumers, this means that trips and vacations abroad are more expensive now and imported goods cost more as well. With the dour situation of the economy today, it sounds like nothing more than wishful thinking when we say that the US dollar is about to bounce back. After all, the country still has a burgeoning trade deficit, demand for the greenback is weakening as investors turn to stronger currencies like the euro, and there's still the possibility that the Federal Reserve will implement more interest rate cuts to bolster the economy.

However, some market experts and economists are saying that the dollar is almost done serving its time in the pits and is about to go back up. With the previous cuts the Feds has instituted, it is now deemed highly unlikely that Ben Bernanke and the gang would employ another steep cut. A quarter-point cut is the highest it would go, market watchers theorize. If and when the economy starts to pick up in the later part of the year, interest rates would eventually be raised. With higher rates, we will end up with a much stronger currency. Some put their hopes on the European Central Bank cutting its own rates to counter the strength of the euro and keep EU products competitive but this is rather improbable as of now.

Another incentive for the Federal Reserve to jumpstart the appreciation of the dollar is inflation. Commodity prices are soaring and a gas tank is getting more and more expensive to fill up. The Feds may want to keep rates low in order to prevent the economy from completely tanking but they will also have to ensure that we don't end up with uncontrollable inflation. Fears of stagflation, a situation where the economy is not growing and prices are skyrocketing, have also surfaced. It's a tough balancing act for the Feds for sure.

Some are also saying that the weak dollar is actually doing the country good. It keeps export prices low and thus more competitive. In fact, the worrying slide of the US currency has prompted several EU leaders to complain that this creates a gaping disadvantage against European products. A depreciating dollar is also said to lower the country's trade deficit which at one point was over $800 billion. Though there is some truth to this claim, the overall costs still outweigh the benefits by a significant margin. For one, the US certainly doesn't export as much as it imports. The country is largely a consumerist society, taking in way more than it can afford so a weak dollar would mean that the expense of imports far exceeds whatever profits may be pocketed from a more competitive exports.

The continuing depreciation of the dollar did more than make a Bordeaux wine more expensive, it has also eroded the image of what was once thought to be the world's most powerful currency. A number of countries are considering a shift to the euro for their main currency reserve. It was also reported earlier that a new oil bourse would be established where petroleum and gas will be traded in non-dollar currencies. Of course, a global change in reserve currency is certainly not going to happen at a flick of a finger. If anything it's going to be a long, arduous, and very painful process not just for the United States but for most national economies as well.

Money Management
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