US dollar to strengthen by 2009 due to positive long-term trends

The OPEC question is another one. To maintain their revenue in local currencies, they will have to raise oil prices to compensate for the lower value of the dollar. The problem is that this reduces demand and thus could lead to an undesirable spiral of even higher prices.

Pravda.Ru: What are the possible threats to the US and global economies?

Christian Weller: Delinking between local currencies and the dollar is a clear threat to the US economy. It means that the beneficial economic relationships that have held for the past few years would no longer be valid. The US could no longer finance its trade deficits at advantageous terms since foreigners would become more reluctant to lend to the US. Over time, this would mean that interest rates in the US would trend upwards. Put differently, because the US dollar had such a strong standing as reserve currency, the federal government and private household could finance their additional consumption by borrowing at relatively beneficial terms in overseas market. Moreover, US borrowers in international markets were not impacted by exchange rate fluctuations. The losses of the dollar of the past few years were all borne by overseas investors and not by US borrowers (as would be the case for any other country). Eventually, international investors may become nervous about such large losses and would like to shift some of the risk onto US governments, firms and households, either through higher interest rates or by requiring repayment in currencies other than the US dollar. In my view, we are still a long way off from this occurring.

Nariman Behravesh: The impact of a weaker dollar on the U.S. is more positive (stronger exports, more direct investment inflows) than negative (higher inflation and interest rates). At a time when the US economy is weak, the falling dollar does not create inflationary pressures. The challenge for Europe and Asia is that as their currencies appreciate, they need to rely less in export-led growth and more on domestic-led growth. The big threat to the U.S. now is high oil prices, especially if they stay at current levels or rise more. For emerging markets, especially commodity exporters (including Russia), the main threat is a hard landing in China, which could bring about a collapse in oil and other commodity prices. If this happens, it would be because the Chinese government tightens credit (after the Olympics) as it tries to bring the economy under control.

Prepared by Alexander Timoshik
Pravda.Ru