Thursday, September 13, 2007

Does A Falling Dollar Cause a US recession?

Will the falling dollar cause a recession in the US?

No, generally a falling dollar can actually help to increase economic growth.

When the dollar falls, US exports will appear cheaper. Therefore this will help boost exports and therefore economic growth. It will also help reduce the US current account deficit.

However, the falling dollar is connected with some of the economic problems associated with a potential recession.

1. Lack of confidence in the American Economy.

The falling dollar is partly due to the lack of confidence in the US economy. People are no longer willing to purchase dollar assets at low interest rates. Therefore, to finance American debt, interest rates need to be higher than previously. The higher interest rates contribute to lower growth.

2. Imbalances in the US economy.

The US has a twin deficit. A deficit on the current account (importing more than exporting) and a government deficit. This outflow of money is putting downward pressure on the dollar. To reduce the current account deficit. It may be necessary to slow down consumer spending. Consumer spending has been the backbone of economic growth in the US. But, with a declining housing market consumer spending is slowing.

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