Views on the dollar’s decline

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An apt summary from Free Exchange:

The usual dynamics of any public discussion on a falling dollar are pretty well established. Lots of market watchers and pundits wring their hands over a poorly defined set of concerns, ranging from hyperinflation to wounded American pride. A number of economists respond that actually, the dollar is looking overvalued against a number of currencies at the moment, and an orderly depreciation of the dollar would go a long way toward improving America’s internal and external economic balances. And then some public official acknowledges that the economists are making sense, only to be chastised into a retraction of the statement by the market watchers and pundits. End scene.

And Martin Wolf points out that the crisis has made a subsequent fall almost inevitable:

We should start with what is not happening. In the recent panic, the children ran to their mother even though her mistakes did so much to cause the crisis. The dollar’s value rose. As confidence has returned, this has reversed. The dollar jumped 20 per cent between July 2008 and March of this year. Since then it has lost much of its gains. Thus, the dollar’s fall is a symptom of success, not of failure.

The desirability of such a decline is debated (follow the links), but the Free Exchange post accurately describes the conventional wisdom amongst economists.

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