Wednesday, July 18, 2012

Essay on US Dollar

Why The Dollar’s Decline Isn’t A Downer

Nowadays, many specialists in the field of economics are extremely concerned about the current trend of the US dollar to decline. Obviously, the question of the dollar’s decline, its current effects and possible consequences to the US economy as well as its causes is really one of the major concerns of leading economists since the role of dollar in the international economic relations is of a paramount importance.

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On analyzing the dollar’s decline, specialists have different views on this problem varying from pessimistic to optimistic positions. In this respect, James C. Cooper, the author of the article “Why The Dollar’s Decline Isn’t A Downer”, basically stands on an optimistic ground. First of all, the author analyses the recent trends and the current position of the US dollar. In fact, he agrees that the value of dollar has declined substantially within a few years since 2002, notably the decline constitutes about 33% in relation to euro.

At the same time, the author indicates that such a decline is not fully determined by objective economic factors. To put it more precisely, he underlines that the US economy is steadily growing, even though the growth is relatively slow it is still not a reason for the sharp decline of a dollar. Furthermore, the international trade is not very favorable to the US that may be viewed as one of the major reasons to the dollar’s decline.

However, the author does not share the fear that such a decline of US dollar can result in a profound economic crisis caused by the rapid downfall of dollar. Instead, the author argues that the decline would probably continue but it would not be sharp. Moreover, he underlines that such a slow decline may be useful for the US economy. In this respect, it is worthy of mention the author’s comparison of dollar to Japanese yen which seems to be in favor of the US currency. Also, it is important to indicate to the fact that interest rates in the US remain relatively low, while in the EU interest rates would probably grow in 2007 that may also provide dollar and the US economy with certain advantages in the international trade.

On the other hand, it should be said that the author seems to be too optimistic and he probably underestimates potential risks of the dollar’s decline. In this respect, it is possible to refer to the recent trends in China which currency reserves are getting to be more and more diverse. In other words, China gets more interested in other currencies which probably are more stable or perspective than dollars, but the author is not worried about such a threat. However, Chinese economy is rapidly progressing and the shift from the US dollar to other currencies may be quite disturbing since its example may be followed by other countries that may led to the weakening of the position of the US dollar in the international trade to the extent that it may be gradually replaced by euro, for instance.

This is why, it is possible to conclude that despite probable benefits from the dollar’s decline in international trade of the US, since lower dollar give larger export opportunities to the US goods, but the threat of the losing its position of the main currency of the international trade and fears of economists concerning the future of dollar are quite serious factor that should make the Fed to be very careful in its policy in order to minimize the risk of a sharp downfall of dollar which would inevitably cause a serious economic crisis in the US as well as in many other countries of the world.
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