The Dollar's Downturn
London - The dollar began a sharp decline against other major currencies in late April. While a steady decrease in its trade-weighted value may help unwind U.S. macroeconomic imbalances, an overly steep and abrupt fall would be hazardous for global economic stability. A meeting of the G-7 finance ministers in Washington triggered the correction. The ministers produced a communique calling for more currency flexibility in China. U.S. Treasury Undersecretary Tim Adams reinforced the move by opposing potential Japanese intervention to manage the yen exchange rate.
The high price of oil has boosted the current account surpluses of Saudi Arabia, Kuwait and other major exporters. While it is doubtful that official institutions will be major dollar sellers, there is a risk that concern about U.S. foreign policy could encourage private investors to avoid the dollar.
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