Dollar Crisis: Prospect and Implications [January 8, 2008]   [open pdf - 120KB]

"The dollar's value in international exchange has been falling since early 2002. Over this five year span, the currency, on a real trade weighted basis, is down about 29%. For most of this time the dollar's fall was moderately paced at about 3.0% to 4.0% annually. Recently, however, the slide has accelerated, falling nearly 10% between January and December of 2007. An acceleration of the depreciation brings the periodic concern of an impending dollar crisis to the fore. There is no precise demarcation of when a falling dollar moves from being an orderly decline to being a crisis. Most likely it would be a situation where the dollar falls, perhaps 15% to 20% annually for several years, and sends a significant negative shock to the U.S. and the global economies. This crisis may not be an inevitable outcome, but one that likely presents considerable risk to the economy. The large U.S. current account deficits are sustained by an inflow of foreign capital. That inflow also exerts upward pressure on the value of the dollar as investors demand dollars to enable the purchase of dollar denominated assets. There is a limit to how much external debt even the U.S. economy can incur. Erasing the U.S. trade gap would stop the accumulation of debt. This would occur through a rebalancing of global spending, composed of a decrease of domestic spending in the United States and an increase of domestic spending in the surplus economies. Such shifts in domestic spending patterns must be induced by a depreciation of the dollar, causing the price of foreign goods to rise for U.S. buyers and the price of U.S. goods to fall for foreign buyers."

Report Number:
CRS Report for Congress, RL34311
Public Domain
Retrieved From:
United States. Department of State, Foreign Press Centers, Bureau of Public Affairs: http://www.fpc.state.gov/
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