The Economist has a nice blurb on the possible global implications regarding the falling U.S dollar. The article highlights the potential problems if China or other fast growing economies decide to dump their current dollar reserves in exchange for a more stable currency. Undoubtedly, the subprime debacle is partially to blame, along with the current deficit; however, I feel the global ramifications are somewhat overstated. With China’s close ties to the U.S. economy, it is unlikely they’ll risk “dollar dumping” in exchange for a better return. However, the long term effects may linger for a while.
The article states:
“A dollar slump would hit financial markets hard, and could force the Fed to raise US interest rates just as the economy was slowing, pushing the US into a protracted recession. At the same time, the Euro would bear the brunt of the dollar's weakening: further Euro appreciation would substantially reduce growth in Europe (we estimate that a 10% rise of the Euro in nominal effective terms would cut growth in the Euro zone by a third of a percentage point). The downturn for the global economy already expected as a result of recent financial market turmoil would therefore be much deeper and more protracted.”