The value of the US dollar is dropping quickly compared to the Euro, Pound and Yuan. Much of this drop is because of a weaker US economy and a stronger world economy. But much of that stronger world economy is because of exports to the US. Many economies, including China, depend heavily on exports to the US for their economic growth.
The US trade deficit is expected to reach $800 billion in 2006. The total US trade deficit for the last 10 years is $4.4 TRILLION. But as the US economy slows, US imports will also slow. As the value of the dollar drops, it makes US goods cheaper to buy. What will happen to the countries that depend on exports to the US?
The dollar is used to set prices for many raw materials, oil, wheat and copper for example. Japan uses dollars for 52% of its exports; South Korea, 85%; Australia, 68%; France and Germany, 33%. The dollar represents 2/3 of the world’s foreign currency reserves with China holding $1 TRILLION and Japan $900 million. 13 countries use the US dollar as their primary currency. All of these products and countries are greatly affected by the value of the dollar.
Countries like China and very rich people hold on to dollars because the US economy is still the strongest in the world. These countries and people buy US stocks, bonds, real estate, and companies with their dollars. They also buy US Treasury bills because they are very safe. This keeps the US dollar from falling even more.
It can be said that the US provides a service to the world economy by providing the dollar as an international currency. In return, the world supplies the US with cheap imports.
If the US dollar drops too far or the US economy becomes too weak, it will affect most of the big economies of the world. Countries exporting to the US would have to change their economies to sell to their own citizens. Internal sales would not likely grow as fast as lower sales to the US and everyone would be poorer. Even with a weaker dollar, it may be in the best interests of the world to keep the US dependent on imports.
Your Opinion, Please
Who suffers most from a declining US dollar?
Who would suffer most if the US reduced its imports in a big way?
Who would China and Japan sell to if the US stopped buying their products?
Do you think the world economy has a problem? Why or why not?
Vocabulary Words
bonds: a kind of loan
currency: dollars, yen, yuan, euros
declining: dropping
deficit: spend more than you earn
dependent: depend on
estate: land
heavily: very much
