Sunday, February 12, 2017

The Economist: Injured reserve Should America want a strong dollar? It’s complicated

     This article discusses a question Trump asked his National Security Advisor: Should America want a strong dollar? If the dollar rises than the money in dollars that an American holds is  now worth more. However, buying anything in dollars is more expensive. If the dollar rises "because the Fed is inducing a deflationary recession, that's probably not good for anyone". If the dollar rises because there has been a discovery of a resource in the US that is high in value, that is also good for most Americans. These descriptions are familiar to most people who have taken basic economic courses. However, the article goes farther into describing overvaluation and under valuation. The author argues that the US dollar is overvalued due to current account deficits. This is primarily due to the fact that the dollar is the reserve currency for the world. So, other countries collect dollars to maintain their exchange rate. A lot of trade is done in dollars so it is easier for you or a company to have a reserve of dollars. Only the USA can provide Reserve-Currency Services. The article explains this is due to the resources and wealth of the US in their ability to provide dollar-based assets; other countries do not have this ability with out creating changes in those dollars and bonds. The US has historically held this role and held the responsibilities " like cooperating with other countries in crises to provide emergency dollar liquidity".  There isn't a straight forward answer to Trump's question. But there are a lot of factors that need to be understood before deciding relationships with other countries.  What is the implication of having a president who promotes protectionist policies on the dollar? Should the US continue to have this role?

Link to Economist Article

1 comment:

Anonymous said...

Exchange rate is a big issue that affect import and export. The author of the article argues that the US dollar is overvalued but I don't think so. Also the United States always blame China for manipulating the exchange rate. I'm curious about how will president Trump do about the dollar.