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

KS2 Teacher

£105 - £120 per day + Expenses: Randstad Education Maidstone: Randstad Educat...

German & French Teacher

£120 - £130 per day: Randstad Education Preston: Randstad Education are curren...

Experienced Cover Supervisors Needed

£55 - £65 per day: Randstad Education Preston: Randstad Education have cover s...

**** Calling All NQT's ****

£90 - £115 per day: Randstad Education Preston: Are you a Newly Qualified Teac...

Day In a Page

Read Next
 

The EU must take more responsibility for the migrants risking their lives to reach Italy

Benjamin Ward
The view from Arthur's Seat, Edinburgh  

Scottish independence: Why I can't wait to leave London and live in a free, independent Scotland

Yannis Baboulias
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week