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<blockquote data-quote="cheryl" data-source="post: 246140" data-attributes="member: 1"><p>The US dollar has been falling for quite a while now. From what I read the Fed helped initiate the latest dollar slide by cutting interest rates:</p><p></p><p>From the International Herald Tribune:</p><p><strong>Dollar tumbles to new low against the euro after Fed's half-point rate cut</strong></p><p></p><p><em>Lower interest rates, used to jump-start the economy, can weaken a currency by giving investors lower returns on investments denominated in the currency.</em></p><p></p><p>How does the weakening dollar effect US citizens?</p><p></p><p>From the Chicago Fed:</p><p><strong>Weakening Dollar</strong></p><p><em>Advantages</em></p><ul> <li data-xf-list-type="ul"><em>U.S. firms find it easier to sell goods in foreign markets.</em></li> <li data-xf-list-type="ul"><em>U.S. firms find less competitive pressure to keep prices low.</em></li> <li data-xf-list-type="ul"><em>More foreign tourists can afford to visit the U.S.</em></li> <li data-xf-list-type="ul"><em>U.S. capital markets become more attractive to foreign investors.</em></li> </ul><p><em>Disadvantages </em></p><ul> <li data-xf-list-type="ul"><em>Consumers face higher prices on foreign products/services.</em></li> <li data-xf-list-type="ul"><em>Higher prices on foreign products contribute to higher cost-of-living.</em></li> <li data-xf-list-type="ul"><em>U.S. consumers find traveling abroad more costly.</em></li> <li data-xf-list-type="ul"><em>Harder for U.S. firms and investors to expand into foreign markets.</em></li> </ul><p>I've read a few articles which predicted this was a symptom that the US is going into a recession which I think is a real possibility. Let's look at the other side. Not everyone thinks the fall of the dollar is a bad thing:</p><p></p><p>From Newsweek:</p><p><strong>Swooning Beautifully</strong></p><p></p><p><em>Falling greenbacks used to induce economic panic. Now, it seems, the dollar's demise may actually be a good thing for America and the rest of the world.</em></p><p></p><p><em>But even as homeowners and greenback-toting tourists abroad feel the pinch, the demise of the dollar will ultimately be a good thing for both the United States and the world. The rebalancing would offset America's $765 billion trade deficit. It would also help reduce the cost of labor and keep more work at home. The diversification of reserve holdings could also help ease U.S. political tensions with China and the Mideast by diminishing the notion that those countries stockpile dollars in order to retain a competitive trade advantage.</em></p><p></p><p>And finally, my favorite part: This is the only explanation I've ever seen that is simple enough to help me understand the difference between exchange rates and [wiki]purchasing power parity[/wiki].</p><p>From The Economist:</p><p><strong>Big Mac Index</strong></p><p></p><p><em>[wiki]Burgernomics[/wiki] is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.</em></p></blockquote><p></p>
[QUOTE="cheryl, post: 246140, member: 1"] The US dollar has been falling for quite a while now. From what I read the Fed helped initiate the latest dollar slide by cutting interest rates: From the International Herald Tribune: [B]Dollar tumbles to new low against the euro after Fed's half-point rate cut[/B] [I]Lower interest rates, used to jump-start the economy, can weaken a currency by giving investors lower returns on investments denominated in the currency.[/I] How does the weakening dollar effect US citizens? From the Chicago Fed: [B]Weakening Dollar[/B] [I]Advantages[/I] [LIST] [*][I]U.S. firms find it easier to sell goods in foreign markets.[/I] [*][I]U.S. firms find less competitive pressure to keep prices low.[/I] [*][I]More foreign tourists can afford to visit the U.S.[/I] [*][I]U.S. capital markets become more attractive to foreign investors.[/I] [/LIST] [I]Disadvantages [/I] [LIST] [*][I]Consumers face higher prices on foreign products/services.[/I] [*][I]Higher prices on foreign products contribute to higher cost-of-living.[/I] [*][I]U.S. consumers find traveling abroad more costly.[/I] [*][I]Harder for U.S. firms and investors to expand into foreign markets.[/I] [/LIST] I've read a few articles which predicted this was a symptom that the US is going into a recession which I think is a real possibility. Let's look at the other side. Not everyone thinks the fall of the dollar is a bad thing: From Newsweek: [B]Swooning Beautifully[/B] [I]Falling greenbacks used to induce economic panic. Now, it seems, the dollar's demise may actually be a good thing for America and the rest of the world.[/I] [I]But even as homeowners and greenback-toting tourists abroad feel the pinch, the demise of the dollar will ultimately be a good thing for both the United States and the world. The rebalancing would offset America's $765 billion trade deficit. It would also help reduce the cost of labor and keep more work at home. The diversification of reserve holdings could also help ease U.S. political tensions with China and the Mideast by diminishing the notion that those countries stockpile dollars in order to retain a competitive trade advantage.[/I] And finally, my favorite part: This is the only explanation I've ever seen that is simple enough to help me understand the difference between exchange rates and [wiki]purchasing power parity[/wiki]. From The Economist: [B]Big Mac Index[/B] [I][wiki]Burgernomics[/wiki] is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.[/I] [/QUOTE]
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