The Future of the Strong Dollar Policy

To operate efficiently the US economy requires about 5 billion dollars daily investments, generally from abroad. The country has a trade balance deficit of about 600 billion dollars and the budgetary deficit of more than 450 billion dollars. Under these circumstances, the government should start implementing the “weak dollar” policy in order to make the exports cheaper, the imports – more expensive and finally cover the difference between the exports and imports value. But there is one serious reason why such policy is unacceptable – decreasing the dollar’s value means reducing investor’s profits.

The strong dollar policy is carried out officially from 1990. The main principle of this policy has always been the statement that a strong dollar is beneficial not only for America, but also for the rest of the world. However, modern economists claim that the power of dollar should be based on the trust to it and not on the amount of foreign currency that can be bought.

But how does this policy actually look? In practice, the strong dollar policy means that the government keeps the rates of interest very high inside the country. Such situation attracts foreign investors and makes the US currency more expensive compared to other world currencies. But, as we all know, a strong currency must be supported by a very strong economy. Many specialists agree that there are no preconditions for implementing this policy in the USA.

The “father” of the strong dollar policy Robert Rubin realized that such policy could be the key to dollar hegemony and would make the export-oriented countries invest their money and support the competitiveness of American companies. The US’ trade partners have to keep their profits in dollar assets if they want to avoid speculative attacks aimed at their currencies. Moreover, the USA is the world’s largest creditor and some of the economists even joke that the only product the American companies export successfully is the dollar itself.

Anyway, in order to get out of the crisis and revive the economy the US government will have to lower the interest rates and this will definitely worsen the American dollar positions. The experts have found out that the dollar should lose about 20% of its value to cut the budgetary deficit and this will make the European, Chinese and Japanese investors sell the US bonds.

In my opinion, the US is going to search for a golden middle. One of the possible variants is to use the so called “selective strong dollar” policy, according to which the government would not only create the strong dollar image for investors but also lend money to American companies and other economic entities on favourable conditions.