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The Vise Tightens on the Dollar

In the second quarter of this year, the US experienced the sharpest plunge in domestic saving on record, dating back to 1947. Because that will continue, and the current-account balance is following suit, the dollar's real effective exchange rate can head in only one direction.

NEW HAVEN – The US dollar has now entered the early stages of what looks to be a sharp descent. The dollar’s real effective exchange rate (REER) fell 4.3% in the four months ending in August. The decline has been even steeper as measured by other indexes, but the REER is what matters most for trade, competitiveness, inflation, and monetary policy.