The Dollar is Falling … The Dollar is Falling!!!

Is the unbelieveable finally about to happen? The plunge of the dollar and the world economy in a spin? Maybe.. who knows!?

The US dollar is plunging in world currency markets – and bringing down share prices in its wake.

But why is the dollar under pressure – and what would be the consequences for the US economy if it continues to fall?

Behind the problems of the dollar lies the huge and growing US trade deficit, and the large Federal budget deficit.

A fall in the greenback could hit Asian countries whose governments hold huge foreign currency reserves in dollars. For many years financial markets have worried about the growing size of the US trade deficit – the difference between the amount the US imports from the rest of the world, and the amount it can sell to the rest of the world.

That deficit has now reached a record $742bn , or 7% of the US economy, and shows no signs of diminishing.

At the same time, tax cuts and the war in Iraq have kept the US budget deficit at around $400bn despite the booming economy.

Asian giants

Much of the trade gap relates to US commerce with East Asian countries such as China, Japan, and Korea, who sell much more to America than they buy.

Together, the East Asian countries have accumulated foreign currency surpluses of nearly $1 trillion, much of it held in US Treasury bonds denominated in dollars.

Thus they are funding both the budget gap and the trade gap.

These huge global imbalances are threatening to derail the world economy, the IMF and other international organisations have warned.

The classic economic view of how to correct such changes is to adjust the exchange rate in order to make US goods cheaper and Asian goods more expensive.

But many Asian currencies – especially the Chinese yuan – do not float freely on international currency markets, and the US has long been pressuring China to revalue its currency.

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