The U.S. dollar fell last week to its lowest point in nearly two years, but key economic policy makers in the United States have yet to take action to prevent the currency’s decline. The U.S. dollar has dropped almost 8% against a trade-weighted basket of currencies in 2011. Although Federal Reserve Chairman Ben Bernanke has publicly expressed a desire for a strong dollar, the Federal Reserve plans to leave interest rates at very low levels for now. The fact that other central banks have started to raise interest rates is promoting some investors to shed dollar-based investments. A declining U.S. dollar may help to promote exports of U.S. products, but it may also trigger inflation by increasing the cost of imported products, including oil. Economic policy makers may become more concerned about the decline of the U.S. dollar if it starts to impact other financial markets such as U.S. stocks or Treasury bonds.
QUESTIONS FOR DISCUSSION:
- Analyze the extent to which the decline in the U.S. dollar is beneficial or detrimental to the U.S. economy.
- How low can the U.S. dollar go before investor concerns reach a tipping point and the decline spills over into other sectors of the economy?
- Critique the options for Federal Reserve Chairman Ben Bernanke if he did decided it was time to try to bolster the U.S. dollar. How effective would the policy tools be that he could use to try to increase the value of the U.S. dollar?
SOURCE: Reddy, D., & Hilsenrath, J. (2011, April 29). Officials unfazed by dollar slide. Wall Street Journal, pp. A1, A4. (Retrievable online at: http://online.wsj.com/article/SB10001424052748703643104576291481753119362.html)
Related video clip: Markets Hub: Officials Unfazed by Dollar Slide. (Retrievable online at: http://online.wsj.com/video/markets-hub-officials-unfazed-by-dollar-slide/F5C02489-4225-4127-99EC-BB177B2BAB4B.html)