Dollar Weakness in the 1990"s

At the end of World War II, the dollar was considered the world's reserve currency. It was made convertible into gold at $35 to the ounce, and other currencies were made convertible to the dollar (if not right away, then eventually). At first, there were not enough dollars to go around, but by the mid-1950s, however, there was a great and growing surplus. The glut of dollars has persisted on and off to this day (Moffit, 1983).

In the 1960s, the U.S. dollar weakened dramatically as a flood of U.S. direct investment poured into Europe. In effect, the long-term capital outflows exceeded the sizeable U.S. trade surplus that then existed. By 1971, this imbalance had wrecked the Bretton-Woods system of fixed exchange rates. Once currencies began floating in the early 1970s, the dollar quickly sank due to a growing U.S. current-account defici

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evels and other world rates up with it. Short-and long-term rates peaking at 10 to 14 %, respectively, exceeded German rates by 4-5 percentage points. Today, U.S. monetary policy remains very loose, its short-term interest rates are, at best, flat in relation to other world rate levels. Though the Fed's modest rate hikes, in 1994 shook the over-leveraged financial markets, they were more symbolic rather than real acts of monetary tightening -- certainly very timid compared to the no-nonsense policies of the Federal Reserve under Volcker, in the 1980s. In fact, one expert has argued that U.S. real interest rates are inadequate to make U.S. investors change the structural diversification on which they have embarked, or to make foreign investors (already long on dollars) buy more (Magnus, 1994). The U.S. Federal Reserve would have to offer considerably in excess of that to re-activate capital flows that would help to push the dollar back up, at least in the medium term. This expert believes that the question is whether U.S. authorities would permit such monetary tightening and, if not, whether they may be forced into it by the extent of U.S. dollar depreciation in the future (Magnus, 1994). The Economist (Oct. 19, 1994)
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Some common words found in the essay are:
War II, Japan German, Federal Reserve, Outlook Future, Capital Account, Grant's July, Financial Times, Economist November, Exchange Rate, Furthermore Economist, current account, private investors, central banks, current account deficit, balance payments, account deficit, current-account deficit, exchange rate, long-term capital, dollar weakness, 1994 economist, grant's july 29, rate exchange rate, los angeles times, exchange rate exchange,
Approximate Word count = 1919
Approximate Pages = 8 (250 words per page)

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