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The slide in the US dollar: One of those good news/bad news jokes?

October 11, 2010

| MoneyRates.com Senior Financial Analyst, CFA

The U.S. dollar has been steadily losing value against the euro since early June, and against the yen for even longer. While your instinct might be to hope for a strong currency, a falling dollar under the current circumstances isn't entirely bad news.

Of course, it isn't entirely good news either. Like one of those good news/bad news jokes, the trick to a falling currency is really a matter of perception.

The good news

  • The weaker dollar may be a goal of policy makers. No, this isn't like Pee-Wee Herman crashing his bike and saying "I meant to do that." U.S. officials may really want the dollar to be heading south. For example, they've been urging China, whose currency doesn't float freely on the exchange markets, to reprice the yuan upward against the dollar for years now.
  • A weak dollar helps trade. The appeal of a weak dollar is that it makes U.S. goods and services more competitive in international trade. Given the dynamic growth of emerging economies, international trade may be the key to pulling the U.S. out of its economic funk.

An improved economy via export growth could ultimately send money market rates, CD rates, and interest on savings accounts higher.

The bad news

  • The slide in the dollar represents a thumbs-down vote for the U.S. economy. The perception that the U.S. economy is sliding back toward recession is one reason commonly given for the recent drop in the dollar.
  • A lower dollar could be inflationary. The U.S. is the world's biggest importer, and a lower dollar will make those foreign goods more expensive.

Inflation is the real warning sign here, since bank rates are so low they don't have much further to fall. Even the best CD rates, money market rates, and savings account rates of today would lose purchasing power if inflation returned to normal levels, let alone saw a 1970s-style upward spiral.

What might tip the balance between good and bad news are the implications of the falling dollar for the federal budget deficit. MoneyRates.com will look at those implications separately, in an upcoming blog.

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