Dangers of the Dollar's Freefall

The US dollar's plunge is ultimately dangerous not only to our economic well-being but also to our currency's standing as the most important global reserve currency. That the freefall is permitted is at best irresponsible.

The dollar is the world's most important reserve currency. With such large erosion in its value, the dollar runs the risk of being dumped by the central banks of the world as they shift their reserve composition towards the euro and dispose of dollars. China's central bank, which has one of the largest reserves in the world, last week announced just such a potentiality. If China and other countries undertake such a measure, the dollar's freefall will only be accelerated and exacerbated.

We are seeing oil prices hovering at near $100 levels. One of the main trendline reasons for this current spike in oil price is the decline in the value of the dollar. Price of oil is denominated in dollars. The lower the dollar goes, the higher goes the price of oil. As oil producers see a decline in the value of their production because of the decline of the dollar-- i.e. their revenues have lower purchasing power-- they drive up the price of oil to compensate for their purchasing power erosion arising from the dollar's decline. This pendulum will continue as long as the dollar falls further. The ultimate impact of high oil prices and low-value dollar on our economy and that of the world's is recessionary.

That our policymakers have allowed this freefall is irresponsible both domestically and internationally. Concerted intervention in foreign exchange markets together with concerted interest rate policy setting by central banks needs to be undertaken to stem and reverse the freefall and prevent global recession.