Of late, there’s been a buzz around the falling dollar and there have been varied views on the pros and cons of this. I’m putting down a couple of important ones below. Pros:-

• The trade deficit of the US is narrowing down. Trade deficit is created when the imports are more than exports for a given country. If a country is importing more than it’s exporting it must be borrowing the differential from somewhere else. This means that the country is borrowing money from other countries. Hence if the trade deficit narrows down - which means that it’s moving towards zero deficit - which would never happen in a practical world of US -the country is borrowing less money from others, which is good for the domestic market as it pays less interest for the borrowed money.
• Exports are cheaper - hence the US can export more goods and services. As dollar falls it’ll be much easier for other nations to buy american goods and services as they have to pay relatively lesser domestic currency than they had to do earlier.

Cons:-

• Imminent inflation as the cost of imported goods is higher. As dollar falls we need to spend more dollars to buy the same thing which we were able to buy with a lesser number of dollars. Not just that but as Oil & Gold around the world are traded in USD terms, a falling dollar will rise the prices of them. This will in turn lead to an increase in the prices of other products.
• Less credibility to the dollar as more and more people start fleeing away from USD as they don’t consider it to be a safe haven any more.

Looking at the above pros and cons, it appears to be more obvious that the pros have more weight than the cons and hence a falling dollar is good for the american economy. But I’d add a lot more weight to the second point in the Cons section. Credibility is a very important factor that’s helped boost the dollar historically against a basket of important currencies. US is always considered to be a safe haven during distressed periods. Because of this notion many nations have piled up reservers of the american dollar in their countries (which in turn lead to a bloated trade deficit earlier in this decade). But now as those nations have been losing their faith in the power that the dollar provides, they have started to sell off the dollar. With the interest rates down and with an upset credit market, it only adds to the worries of the declining dollar.

All these factors have painted a gloomy picture for the dollar and it started sliding down much faster. I anticipate it to slide even more before stabilizing for a while, but I doubt - with the lost faith - if the dollar will make it back to the helm again. On the other hand the rival - EURO - has been going great guns. At this point I don’t think EURO has reached it’s peak, but the upside doesn’t seem to be great going forward. This is because the ECB is widely expected to hold on the interest rates and at the same time the Fed will not be convening for a while from now onwards. More over the Fed has expressed it’s interest in not cutting the interest rates further down the road. So the message is clear for the next few months — SHORT DOLLAR and HOLD EURO –.