Financial reports indicate that the U.S. dollar is weakening. Some times the dollar falls sharply against other major currencies like the euro and the Japanese yen. “Global growth is dependant on the united states and china” (Walayat, 2008).If this is so, it means that instability of the dollar will have adverse effects on world markets.
There is a serious challenge arising from the weakening of the U.S. dollar-the U.S current account economic deficit. Due to this deficit, the U.S. will have increased needs for finance, it will use currencies from lenders, and these lenders will suffer as a result of a fall in the value of the U.S. dollar. Unless the U.S. takes precaution to reduce its need for external financing and unless the world takes precaution to reduce its dependence on an unstable expansion in U.S. domestic demand to support its own growth, there is going to be a sharp fall in the value of the dollar and a rapid rise in U.S. interest rates which will eventually lead to a global depression of all big economies (Walayat, 2008).
Another impact of a weak US dollar is that central banks are exposed to large losses from their holdings of dollars. For example, a 30 percent fall in the dollar against the euro would result in a capital lose to currencies affected. This loss will subsequently affect the GDP (Beams, 2005).
The U.S. dollar has already been proved to be durable and successful in the economy upon which it is based, this affects the rate of growth of the other currencies especially the euro, the yen and other big currencies. Before any other currency comes closer to matching the dollar in these aspects, it may take forever. This explains why despite the turbulences it faces and despite the stability of the other world currencies, they will still lag behind as far as their growth and sustainability is concerned. The major factors behind this are the large size of the U.S. market, the US political stability which gives financial institutions enough security and believe that there is enough supply of dollars to be traded on (Faux, 1999).
Under all this circumstances, the European central bank would still want to create credibility and investor confidence in the euro and out do the U.S. dollar, to achieve this, it keeps interest rates higher than reasonable, it also maintains top secrets on how it operates, investors will therefore doubt its stability and trust the dollar. They will eventually invest in the U.S. markets which mean that the euro will stagnate at par with U.S. dollar or lie below it. Another consequence here is unemployment and low wages for the employed (Walayat, 2008).
What does the dominant yet shrinking U.S. economy mean to the rest of the world? We can predict that Canada and Mexico will begin to have trade deficits with United States, industrial employment falls and their currencies fall with the dollar. All the other countries which trade with the United States like China and Asia will find their trade balances deteriorating (Faux, 1999).
African countries, Argentina and Brazil which trade less with United States may not be immediately affected. However, conditions demanded by the international monetary fund and the U.S. like low interest rates will generally cut investor confidence in such countries. Their economies deteriorate and in general the world face general depression. All these are negative impacts but could still be some positive impacts. In the case of economic decline, the U.S and Europe will unite to check the situation. In the process they will intervene in the world markets which may lead to some economic recovery (Beams, 2005).
List of references
Beams, N (2005) Financial markets shaken by U.S. Dollar scare.
Faux, J (1999) The euro, the Dollar, and their impact on global manufacturing.
Walayat, N (2008) U.S. Dollar Bull Market Update.