The Future of the Dollar

While the turmoil in Europe and the uncertain future of the euro have caused a pause in the shift from dollars to euros, countries with large reserves are now overweight dollars, and their effort to balance risks will cause the euro to rise again relative to the dollar. The dollar's salvation will be policies that reduce the growth of the US national debt.

CAMBRIDGE – American economic policy aims for a dollar that is strong at home and competitive abroad. A strong dollar at home means a dollar that retains its purchasing power, thanks to a low rate of inflation. A competitive dollar abroad means that other countries should not implement policies that artificially depress the value of their currencies in order to promote exports and deter imports.

The goal of a strong dollar at home has guided the Federal Reserve at least since Paul Volcker crushed inflation in the early 1980’s. Although the United States does not have a formal inflation target, financial markets understand that the Fed aims for an inflation rate close to 2%. And, while the law mandates the Fed to ensure sustainable growth as well as low inflation, monetary officials recognize that sustainable growth requires price stability.

For decades, US Treasury officials have insisted that “A strong dollar is good for America.” But that slogan has never been a guide to official US action in international markets.

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