Summary
The US Dollar being the kingpin of the hard currencies until now, but not very sure in future , it's exchange rate has been affecting the US economy and the rest of the world.The US financial markets , including the derivative markets,being the most liquid and deep among the financial markets, has attracted capital from the rest of the world to USA, and hence it has been able to live with huge deficits in its BoP current account, and led to a situation where the Ammericans have been able to live beyond their means.But every cris including the recent sub-prime crisis and the recession of the US economy deflates the aforesaid high optimism about the US economy and markets.Also, recently the central banks of many countries have shifted their currency reserves from the US dollar to the Euro and other currencies , and the international investors have shifted the investments to the commodities and gold , which in turn has contributed to the commodity price inflation in many countries.
Analysis
The above factors have led to the fall in the value of the US dollar.This may lead to a fall in the relative price of the US dollar and the increase in its exports to some extent. But the value of the dollar is determined in the asset markets , and the fall in the demand for US assets have not been arrested.Eventhough the Federal Reserve System has reduced the short term interest rates, and the Federal spendinmg programmes have been initiated in right earnest, the investments in US economy have not picked up , and the non-farm payroll growth rate has not been commentable.The skyrocketing increase in crude oil prices has made the situation very delicate. One of the reason for the decline in dollar itself is the oil price increase , and the invoice currency is dollar.
So, one has to watch the data on price adjusted real exchange rate on dollar to say if it help in increasing US exports and resducing the current account deficits, and even in increasing investment in US.All these have implications for US exports, US investment and the financial markets. The rest of the world economies will also be affected , as the decoupling from the US econnomy has been far from complete.
