The Crotchet’s Corner

My perspective about all things inconsequential

The dollar paradox …

It sounds so paradoxical.

 

The global economy is a mess, recession is biting hard across the board, banks are going bust, stock markets are witnessing a dizzy downward slide, and consumer confidence has taken a beating.

 

It is generally accepted that the mess began in the United States, starting with the sub-prime crisis, and later to the huge hits that financial institutions took thanks to piles of what is termed “toxic debt”.

 

Investment banks have gone broke, and international icons such as General Motors are facing the possibility of bankruptcy.

 

Yet, for all this, the U.S. Dollar has been strengthening by the day. Doesn’t sound right, does it?

 

The fact is that international investors have pulled money out of developing economies, such as India, and pumped it all back into the U.S. to purchase instruments such as Treasury Bonds – the concept of parking funds in a safe (safer??) haven. The need to find cash to fund these huge withdrawals meant that fund managers had to sell off other assets (including other currencies) in order to buy enough of the U.S. Dollar, and, in the process, further strengthened the currency.

 

There was also the fear that some of the other currencies such as the Euro were over-valued, to start with, for the past few years, and that the bubble would soon burst. Inevitably, money managers began to pull out before an anticipated correction took place. The sluggishness of the European economies, which initially looked down on the U.S. financial crisis, only added to the problem, as there were few signs of any serious and concerted effort to address the situation.

 

It’s not that American institutions are investing more overseas. They are not. But, by keeping their funds back home, they are ensuring that the others have less of it available. And, the flight of funds towards the Dollar means that there is that much less of this currency left in other parts of the world that critically need it.

 

For sure, a strong dollar will hurt U.S. exports and will make exports from the developing world cheaper. However, recession, particularly in the U.S. has meant that demand for products from the developing world has fallen, thereby aggravating the problem.

 

With large bail-out plans in place, the U.S. needs funds, and, consequently, financing this through bringing in more buyers of American debt appears to be the obvious route.

 

It’s hurting a lot. And, as I said earlier, it is really paradoxical.

Advertisements

March 9, 2009 - Posted by | About this and that | , , ,

No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: