Offshore Capitalist

Economist: Dollar decline is overblown

From The Economist on the worries over the recent dollar’s decline…

Dollar declinism is overblown. It exaggerates the scale of the slide and misunderstands its cause. Much of the recent weakness simply reverses the earlier safe-haven flight to dollars, a sign of investors’ optimism about riskier assets rather than their fears about America’s currency. On a trade-weighted basis the dollar today is close to where it was before Lehman failed. Yields on Treasuries have not risen and spreads on riskier dollar assets continue to shrink. If investors were growing leerier of dollars, the opposite should have occurred.

Furthermore, a weaker dollar is what you would expect, given the relative cyclical weakness of America’s economy. Thanks to the hangover from its financial crisis, America’s recovery will be slower than that of other economies, especially emerging ones. That suggests America’s monetary policy will stay looser for longer, pushing the dollar down. A weaker dollar should also assist global economic rebalancing by helping to reorient America’s economy towards exports. So in general, it should help rather than hinder the global recovery.

via Currencies: The diminishing dollar | The Economist.

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