The Weak Dollar-Good or Bad?
The Weak Dollar-Good or Bad?
Is the weakening of the dollar a sign that the U.S. is losing its place in the world and that the U.S economy is deteriorating or could it actually signify strength?
Traditionally, a strong currency has been as a sign of strength but in the age of globalization, things are very different. Companies compete by making their products cheaper and better so it stands to reason that the health of a nation's economy can be viewed the same way because exports play such a vital role. In the age of globalization the health of an economy is all about that country’s competitive position in global trade.
Currencies tend to strengthen in response to rising interest rates and fears of inflation, which usually come after a period of extended economic expansion and precede economic contraction. Lower inflation prospects tend to weaken a currency and often precede periods of economic expansion. It makes sense because lower interest rates allow for economic growth due to lower borrowing costs while the opposite holds true for higher interest rates. Let's look at a few examples:
China's currency collapsed in the Asian crisis of 1997 and an incredible decade of economic expansion has followed. The pound collapsed in 1992 leading to an extended period of U.K. expansion which is now requiring the BoE to tighten as inflation has worsened.
The Yen hit a record high in 1995 and the Japanese economy stagnated for years. Their recent growth has come at a time of Yen weakness against their major trading partners. The eurozone’s dismal economic performance from 2003 to 2005 occured as the euro appreciated by 60% against the dollar.
In the age of globalization, it's likely that as an economy's currency keeps rising its export competitiveness will be hurt and its growth will be damaged. Therefore, the race to remain competitive is partially a race to depreciate a currency. Seen in this light, inflation is damaging not only for its effects on purchasing power but because of its effects on rising interest rates and currency valuations.
Would you now expect Bernanke to say anything other then inflation remains his number one concern when he goes before congress this week?
NewstraderFX - Forexfactory
Is the weakening of the dollar a sign that the U.S. is losing its place in the world and that the U.S economy is deteriorating or could it actually signify strength?
Traditionally, a strong currency has been as a sign of strength but in the age of globalization, things are very different. Companies compete by making their products cheaper and better so it stands to reason that the health of a nation's economy can be viewed the same way because exports play such a vital role. In the age of globalization the health of an economy is all about that country’s competitive position in global trade.
Currencies tend to strengthen in response to rising interest rates and fears of inflation, which usually come after a period of extended economic expansion and precede economic contraction. Lower inflation prospects tend to weaken a currency and often precede periods of economic expansion. It makes sense because lower interest rates allow for economic growth due to lower borrowing costs while the opposite holds true for higher interest rates. Let's look at a few examples:
China's currency collapsed in the Asian crisis of 1997 and an incredible decade of economic expansion has followed. The pound collapsed in 1992 leading to an extended period of U.K. expansion which is now requiring the BoE to tighten as inflation has worsened.
The Yen hit a record high in 1995 and the Japanese economy stagnated for years. Their recent growth has come at a time of Yen weakness against their major trading partners. The eurozone’s dismal economic performance from 2003 to 2005 occured as the euro appreciated by 60% against the dollar.
In the age of globalization, it's likely that as an economy's currency keeps rising its export competitiveness will be hurt and its growth will be damaged. Therefore, the race to remain competitive is partially a race to depreciate a currency. Seen in this light, inflation is damaging not only for its effects on purchasing power but because of its effects on rising interest rates and currency valuations.
Would you now expect Bernanke to say anything other then inflation remains his number one concern when he goes before congress this week?
NewstraderFX - Forexfactory
posted by Forex_Trader at 12:22 PM
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