Leading article: Volatility threatens us all

Share

To understand why we should be concerned about the plunging value of the US dollar on the international currency markets, it is first necessary to appreciate why it is happening. A significant factor behind the decline is a recent hint from China that it may begin to diversify some of its foreign currency holdings out of dollars. The merest suggestion of a change in policy from Beijing has helped send the mighty American dollar reeling. What this shows us is how finely balanced - and potentially volatile - the world's economy is at the moment.

Of course, a weaker dollar is good news for any tourists visiting the US. Britons crossing the Atlantic for some Christmas shopping will find some goods, in effect, half price. But the potential wider consequences of its fall could be a considerably less attractive for all of us.

At the heart of the problem is the fact that Asian countries - China in particular - have a long-standing policy of holding vast foreign currency reserves in dollars to keep their own exchange rates down and boost their exports. This hoarding has financed the huge balance of payments deficit the US has accumulated in the past six years. The International Monetary Fund fears this imbalance has the potential to derail the entire world economy.

In one sense, the falling value of the dollar is a natural corrective to the US balance of trade imbalance. International finance markets are taking matters into their own hands by forcing the dollar's value down. A slightly weaker dollar is not in itself a bad thing, given that it is obviously overvalued.

The real danger is a disorderly fall. A rapid hike in the price of imported goods in the US could lead to domestic inflation and recession. Foreign companies derive an increasing proportion of their sales and profits from the US market. They would be hit by falling demand for their exports. So dominant is the US economy and so globalised have our economic relations grown that a recession in America would rapidly spread around the world.

Some will argue that none of this is anything new. A similar currency imbalance resulted from the massive Japanese economic expansion of the 1980s. Two decades ago, the US and Japan managed to get their central banks to work in concert and succeeded in managing an orderly descent in the value of the dollar. It is a moot point whether a similar deal will be possible this time.

Yet this hints at a solution. The global economy grows ever more sophisticated each year, but lacks any real international co-ordination of currency policy. This must be put right. The present potential for volatility is in none of our real interests - not even transatlantic bargain hunters.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Lead Application Developer

£80000 - £90000 per annum + competitive: Progressive Recruitment: I am current...

Senior Networks Architect

£65000 per annum + 15% Pension, Health, Travel & Bonus: Progressive Recruitmen...

SAP BW/BO Consultant

£55000 - £65000 per annum + Benefits: Progressive Recruitment: SAP BW/BO CONSU...

Hydraulic Power Pack Design Engineer

competitive: Progressive Recruitment: I recruit for contract mechanical design...

Day In a Page

Read Next
 

How silly of me to assume it was Israeli bombs causing all the damage in Gaza

Mark Steel
 

Careful, Mr Cameron. Don't flirt with us on tax

Chris Blackhurst
Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices