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The nearly 10% decline in the value of the US dollar - since it reached its highest level in March - has led to the emergence of two distinct scenarios: The first adopts a short-term perspective that focuses on the benefit that the depreciation of the dollar brings to the US economy and markets. The second adopts a far-reaching view that reflects concern about the fragile status of the dollar as a global reserve currency. Both narratives reflect some truth, but this is not sufficient to justify the emerging consensus around them.
In a report published by the British newspaper The Guardian, writer Mohamed El-Erian said that several factors have combined to stimulate the dollar's decline in recent weeks, a decline that reverses half of the rise witnessed in the past ten years within months.
As the US Federal Reserve eased monetary policy in response to lower economic expectations, income from safe, dollar-denominated sources, such as government bonds, declined. With investments in the US losing some of their attractiveness, there has been a shift in holdings in favor of emerging markets and Europe.
Different effects on countries
There are indications that capital inflows into the US are declining, as home buying by foreigners appears to have fallen again, in part due to the US government's adoption of policies that encourage domestic trading and sanctions measures.
With the exception of Lebanon, Turkey and a few other countries that witnessed a sharp decline in exchange rates compared to the United States, most currencies strengthened against the dollar, but there is a divergence in the reactions to this generalized phenomenon among the countries whose currencies appreciated.
On the other hand, some countries, particularly the developing world, have welcomed the depreciation of the dollar because it gives them more scope to support domestic economic activities through more stimulus fiscal and monetary measures.
In a report published by the British newspaper The Guardian, writer Mohamed El-Erian said that several factors have combined to stimulate the dollar's decline in recent weeks, a decline that reverses half of the rise witnessed in the past ten years within months.
As the US Federal Reserve eased monetary policy in response to lower economic expectations, income from safe, dollar-denominated sources, such as government bonds, declined. With investments in the US losing some of their attractiveness, there has been a shift in holdings in favor of emerging markets and Europe.
Different effects on countries
There are indications that capital inflows into the US are declining, as home buying by foreigners appears to have fallen again, in part due to the US government's adoption of policies that encourage domestic trading and sanctions measures.
With the exception of Lebanon, Turkey and a few other countries that witnessed a sharp decline in exchange rates compared to the United States, most currencies strengthened against the dollar, but there is a divergence in the reactions to this generalized phenomenon among the countries whose currencies appreciated.
On the other hand, some countries, particularly the developing world, have welcomed the depreciation of the dollar because it gives them more scope to support domestic economic activities through more stimulus fiscal and monetary measures.
