Monday, February 17, 2014

US Dollar Stability – For How Long?

For decades now the US dollar has been the international currency against which many other currencies are bench-marked but with China looking to become the leading world trading nation and the US economy struggling to get a firm grip, some are concerned over US dollar stability and whether the dollar's exalted position will remain much longer.

The greenback is the world's most commonly traded currency and it's the currency that gold, oil and many other commodities are priced in but something is happening that threatens US dollar stability which means its position may yet be threatened.

America's trade and budget deficits have led to large amounts of borrowing such that many countries, in particular Asian ones, hold trillions of dollars of US debt.

Over the last twelve months they have seen the value of that debt slowly decline as other economies have emerged from the recession in a stronger position than the US. A continued decline in the dollar's value is likely to lead some of the holders of US debt to consider selling and, as a result, further undermine US dollar stability.

We've seen this talk before and minds have recently been cast back to 2006 when the dollar was seriously under pressure from a rampant trade deficit that was being ignored by many in authority. At the time the authorities would wave the implications away with the comment that it was America they were talking about, not some third world country where such economic problems would amount to a catastrophe.

The trade deficit has reduced but the budget deficit and the national debt has increased. Problems have been resolved but others have risen to take their place.

Many say that the dollar cannot possible fall from grace but then that was once said about sterling.

Looking at long term trends, the dollar is on a downward path against the pound and the euro. Soon, if that trend persists, those with power will be asking serious questions and who knows what the answers might be?

In the United States, the American arena will witness many economic events this week, although U.S. markets are closed today celebrating the Presidents Day holiday, while key economic data will be released throughout the week to reflect the health of the largest economy in the world, including inflation data through the CPI and PPI readings, the FOMC meeting, also the U.S. companies will continue to release the results of its operations during the fourth quarter of the previous year 2013.

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