The panic about the dollar

For the last couple of years the value of the dollar has been sliding gradually. The last couple of months, however, the dollar has lost value at an increased pace. Analysts have been warning for a full-blown collapse of the dollar. Many ingredients for a nasty crash are already present.

Since years, the US has been accumulating a gigantic trade deficit. That pain has been relieved somewhat in itself because of the lower dollar value. However, it remains an enormous problem.

More recently, the credit crisis has added troubles for the dollar and the Fed. Traditionally, America’s deficits have been sustained by two factors. At first, foreign national banks have been very willing to offer cheap loans to America and have, by doing so, sustained the Americans’ shopping spree and thus the foreign producing industries. Lately, however, these national banks have proven to be less willing to offer cheap credit to the American economy. Secondly, the intentions of some national banks to swap the dollar for the euro as the currency for their reserves may add to the woes of the dollar and the Fed.

All these developments make up a perfect mix that may herald a crash of the dollar. However, far too much is at stake. Analysts believe that self-interest and sensible policy can cut the odds of trouble.

I believe that the international markets already are very volatile. Further troubles with the dollar could increase this instability even more. The consequences would be disastrous, not only for the American economy but also for the entire global economy. An even more weakened dollar would kill European export to the States and would thus harm the European economy. Such an dynamic would put economies in recession for years.

Sarah Struyf

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