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Exchange rates - Case Study

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Investors embraced the perceived safety of the American dollar as the financial crisis shook the world in 2008. But since March 2009, as stock markets rebounded and investors again rolled the dice in riskier markets, the dollar has suffered, raising questions about whether its status as a go-to currency for trade and investment would fade in the coming years.

Washington officially supports a strong dollar, but a weaker dollar, while raising the prices of imported goods like oil, also helps give American manufacturers an edge in foreign markets by decreasing the relative price of their products. Officials in the Obama White House have done little to curb the dollar's more recent slide.

As budget deficits reached an estimated $1.6 trillion for 2009 and the government printed money to finance its financial rescue programs, other countries and investors started to get nervous. China, which holds the most dollar reserves, raised concerns about rising American debt, and some of its top officials floated proposals that would replace the dollar as the world's reserve currency. Global investors began putting more of their money into Euros. And in October, rumours surfaced that the oil-producing countries would stop pricing oil in dollars, though that speculation was quickly batted down by governments in the Middle East and Russia.

The American economy is still the largest in the world, and with so many trillions of dollars being held by foreign governments, the dollar's dominance in world markets is not likely to fade quickly. Still, worries abound.

Adapted from: New York Times
Oct. 12, 2009


Question 1

Define the term 'exchange rate'.

Question 2

Analyse the effects of a falling dollar on the US economy?

Question 3

Discuss how falls in the value of the US dollar will affect US businesses that trade with the European Union.