Is the Dollar Really Going Out of Style?
Right now the dollar is being pummeled by traders, but its real future lies in the hands of the Federal Reserve.
Reports of the dollar’s imminent demise aregreatly exaggerated. Since its most recent peak in March ofthis year, the greenback has fallen about 10% on a trade-weightedbasis. One-on-one against the euro, the buck is down 15% over the sameperiod, but even by that measure, it remains well above its April 2008record low of $1.60 to the euro.
It would take a far more rapid sell-off to suggest a genuine currency crisis. “If the dollar’s decline got really out of hand, say 30% in a relatively short time, it would become very hard for the U.S. to roll over its debt at current interest rates,” says Niall Ferguson, a Harvard University professor who specializes in financial history.
But such a rapid dollar fall is unlikely unless there’s a total loss of confidence in the U.S. economy and its financial markets. This might have been expected at the height of the financial crisis. In fact, one of the biggest surprises of the crisis was that investors flocked to the dollar as a safe haven.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If anything, the dollar’s decline over the past seven months reflects traders’ confidence in a global recovery. With the federal funds rate still close to zero and investors regaining some appetite for risk, many are selling dollars to buy higher-earning foreign currencies. This process, known as the carry trade, was one of the factors that pushed the dollar down during the final years of the most recent boom.
“You’re seeing a pretty broad-based love affair with emerging market assets, including but not limited to equity markets,” says Philip Suttle, director of global macroeconomic analysis at the Institute of International Finance in Washington, D.C.
The buck’s value won’t climb till the Federal Reserve hikes interest rates, probably not until mid-2010 at best. When that happens, though, the appreciation could be particularly sharp. When traders see that such a hike is imminent, many will start unwinding their positions in the carry trade.
That has the potential to whipsaw those emerging market economies that have no or minimal currency controls. At present, their currencies are climbing rapidly against the dollar, making their exports less competitive. But investments now pouring into their economies could drain just as quickly when the dollar recovers. Even more worrisome is the prospect of such hot money fueling inflation and asset price bubbles, which could burst with devastating effect. Brazil, which suffered a currency crash in 1998-1999, has just slapped a 2% tax on capital inflows to cool such speculation.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Rally Fades on Mixed AI Revolution News: Stock Market Today
All three main U.S. equity indexes opened higher but closed lower as a seven-session winning streak for the S&P 500 came to an end.
-
Stretch Your Holiday Shopping Budget Further with These Under-$50 Gifts That Don't Feel Cheap
Amazon October Prime Day is the perfect chance to nab some under-$50 gifts that feel more expensive than they are (because normally they would be).
-
Apple Readies for AI Upgrade with New iPhones
The Kiplinger Letter The tech giant has stumbled when it comes to artificial intelligence, but a new batch of iPhones will help it make headway.
-
Japan Enters a New Era of Risk and Reform
The Kiplinger Letter Japan has entered a pivotal moment in its economic history, undertaking ambitious policy and structural reforms to escape from decades of stagnation.
-
How Consumers Are Tinkering with Cutting-Edge AI
The Kiplinger Letter Companies launching artificial intelligence tools are jostling for consumer attention. Some products are already building a deep connection with users.
-
After Years of Stagnant Growth, Hope Emerges for EU Economy
The Kiplinger Letter Can a German fiscal push outweigh French political peril?
-
Small Businesses Are Racing to Use AI
The Kiplinger Letter Spurred on by competitive pressures, small businesses are racing to adopt AI. A recent snapshot shows the technology’s day-to-day uses.
-
How AI Puts Company Data at Risk
The Kiplinger Letter Cybersecurity professionals are racing to ward off AI threats while also using AI tools to shore up defenses.
-
AI Start-ups Are Rolling in Cash
The Kiplinger Letter Investors are plowing record sums of money into artificial intelligence start-ups. Even as sales grow swiftly, losses are piling up for AI firms.
-
What is AI Worth to the Economy?
The Letter Spending on AI is already boosting GDP, but will the massive outlays being poured into the technology deliver faster economic growth in the long run?