Dollar Crisis: Prospect and Implications (CRS Report for Congress)
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| Release Date |
Revised May 6, 2008 |
| Report Number |
RL34311 |
| Report Type |
Report |
| Authors |
Craig K. Elwell, Government and Finance Division |
| Source Agency |
Congressional Research Service |
| Older Revisions |
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Summary:
The dollar's value in international exchange has been falling since early 2002. Over this five year span, the currency, on a real trade weighted basis, is down about 25%. For most of this time the dollar's fall was moderately paced at about 2.0% to 5.0% annually. Recently, however, the slide has accelerated, falling about 9% between January and December of 2007. An acceleration of the depreciation brings the periodic concern of an impending dollar crisis to the fore. There is no precise demarcation of when a falling dollar moves from being an orderly decline to being a crisis. Most likely it would be a situation where the dollar falls, perhaps 15% to 20% annually for several years, and sends a significant negative shock to the U.S. and the global economies. A crisis may not be an inevitable outcome, but one that likely presents considerable risk to the economy. [â¦] The transition to a new equilibrium of trade balances may not be smooth, likely involving a slowdown in economic activity or a recession. The ongoing U.S. housing price crisis raises the risk of a dollar crisis causing a recession. With fiscal policy most likely out of consideration in the near term, the task of attempting to counter the short-term contractionary effects of a dollar crisis would fall upon the Federal Reserve. A stimulative monetary policy can be implemented quickly but its eventual effectiveness is uncertain. The most useful policy response by foreign economies would be complementary expansionary policies to offset the negative impact of their appreciating currencies on their net exports. Attempts to defend a currency against this crisis driven appreciation would be costly and likely fail.
