Some of America's trading partners aren't so supportive of a lower dollar. Russian Prime Minister Vladimir Putin this week called U.S. monetary policy "hooliganism" for flooding the world with cheap dollars.
One side effect of a weak dollar is that it has become a source of fuel for market speculation, notes Michael Woolfolk, currency strategist at Bank of New York Mellon. Hedge funds and other investors worldwide can borrow dollars at low interest rates and use that money to buy other assets, including emerging-market stocks and commodities.
Barry Eichengreen, a UC Berkeley economics professor, chronicled the dollar's history in his book, "Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System," published this year. Although he believes that the dollar is in a long-term decline, he said he doubted that we're headed for a currency meltdown in the near term.
There's a practical barrier to a sudden collapse, Eichengreen said: "There has to be somewhere to flee to." The dollar remains preeminent as the world's primary currency, and no other paper currency has the market presence to take over for the greenback. Neither do gold or silver. Still, he expects that the dollar's status will continue to erode over the next few years, and that both the euro and the Chinese yuan will become more viable alternatives to the greenback for global investors weary of seeing their dollar holdings devalued.
If the world feels less compelled to hold dollars, one result will probably be higher interest rates if the Treasury remains on a borrowing bender. So S&P's warning about U.S. debt levels should be taken seriously in Washington, Eichengreen said. "This will hopefully concentrate the minds of the politicians."
For more: Dollar and currency exchange rates: For the dollar, a 'crisis' is relative - latimes.com
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