A sharpening slide in the US dollar unnerved global markets on Friday as investors sought to protect themselves from the possibility of sustained dollar weakness. As US markets were closing on Friday, the euro stood at a 19-month high of $1.309, up 1.2 per cent, while sterling gained 0.9 per cent to a 1½-year peak of $1.9333. The yen climbed 0.5 per cent to ¥115.66. European and Asian stock markets suffered the fallout from the dollar’s decline with exporters to the US the worst performing stocks in all regions.
Isn’t it interesting that Neil Dennis, Chris Giles, and Ralph Atkins focus on foreign shareholders and not on workers? Of course, U.S. import demand declines when the dollar devalues. But doesn’t that spell good news for U.S. firms that export abroad? Menzie also treat us to a paper from Paul Krugman entitled “Will There Be a Dollar Crisis”, which addresses two basic questions:
Concerns about a dollar crisis can be divided into two questions: Will there be a plunge in the dollar? Will this plunge have nasty macroeconomic consequences?
Some bit of goods news from Paul as noted by Menzie:
The dollar decline should have a net positive effect on aggregate demand via expenditure switching.
In other words, we can avoid a recession even as we move to fiscal restraint if we allow currencies to float.