Wednesday, October 24, 2007

Weak Dollar is Canary in Proverbial Economic Coal Mine

THE DROP IN THE DOLLAR'S VALUE AGAINST LEADING CURRENCIES WILL HAVE REPERCUSSIONS, WHATEVER THE IMMEDIATE CONSOLATIONS :: Americans living overseas see the front edge of the dollar collapse. Life in Europe seems to be twice as expensive as just a few years ago, as Euro-driven price-inflation meets the rapid drop in the value of the dollar against major currencies, like the Euro and the British Pound Sterling. Americans at home are facing higher food prices, higher fuel costs, and an overall slowdown in home-buying.

This is partly due to the US dollar's reduced ability to 'capture' wealth from abroad, via currency exchange, and by extension, via trade. As the dollar falls in value —losing 10% of its value against the Euro in just a few months, and roughly 41% of its value against the Euro since November 2000, when a Euro cost just $0.83—, it less likely that additional wealth will flow into the US economy by means other than the export of manufactured or agricultural goods. And, it is important to note that those exports need not increase in proportion to the dollar's decline.

For now, China has helped by aggressively promoting its exports to the United States, but should it feel able to free up some of that economic might for other pursuits —for instance, to double the EU market for Chinese exports—, the US could see the current economic bubble become suddenly very visible and very brittle. [Complete Text]

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