US Dollar Continues to Fall

Sources: Associated Press/International Herald Tribune; Financial Times

The U.S. dollar hit record lows this week amid fears of a Federal Reserve interest rate cut and a potential economic slowdown. This drop in the US dollar value is a reversal in recent trends. The dollar had been benefitting from international currency instability. This, however, stopped in light of the recent US economic downturns. The weakest job data in the past four years catalyzed this downturn in dollar value. Furthermore, "as it increasingly appears the US economy will suffer more than elsewhere," the dollar is likely to continue falling in value.

Lower interest rates make the US dollar less attractive, and therefore, the dollar has continued to fall. In the past week, the dollar has fallen 2% against the Euro. The US Dollar has also fallen against other currencies, such as the Canadian dollar. The dollar index (which tracks dollar value against six leading currencies), fell to its lowest level since September 1992.

The Federal Reserve Bank is expected to cut interest rates by as much as half a percentage point to fend off an economic slowdown. An interest rate cut generally provides a short-term boost for the economy, but also generally weakens the dollar because investors get lower returns on dollar-based investments. This expected move is a means of fending off an economic slowdown. Weak August job data and the subprime mortgage crisis have “fueled jitters about an impending recession.” The current economy, furthermore, does little to alleviate those jitters. August retail sales dropped sharply and industrial production was the lowest in three months.

DISCUSSION THOUGHT

1. In light of interest rate cuts, do you think that US interest rates will fall to the record lows of the early 2000s?

2. Will there be a US recession--and if so, how much of an international effect will the recession have?