There’s a lot of heartburn in Europe over the recent slide in the value of the dollar. American journalists traveling in very expensive Denmark are also generally unhappy about this situation. But it’s hard to see what the alternative is. For years the United States has been running an unsustainable trade deficit. What “unsustainable” means is that it’s not possible for it to be sustained. And the way you would stop sustaining it would be for the dollar to fall in value. American consumers will buy fewer imports if imports become more expensive. And American exporters will sell more to markets abroad if US-produced goods get cheaper. Foreigners will become more inclined to visit the United States, and Americans will become less inclined to travel abroad. That will even out the flows, and stabilize the currency markets.
Asian central banks are trying to prop the dollar up but this is like trying to roll a gigantic boulder uphill. The level of global demand for US-made goods at the dollar’s current price simply isn’t high enough to justify the current value of the dollar.
Meanwhile, the interests of American tourists aside, a falling dollar is exactly what the American economy needs. It’s a way of, in effect, driving wage levels down to a level at which increasing employment is economical and getting us out of current sky-high unemployment. Of course for the same reason foreign central banks will want to bolster the value of the dollar in order to prevent unemployment from rising in Europe and Asia. I think the real risk here, however, is that foreigners will go to far in terms of trying to sustain an unsustainable situation and ultimately prompt a bigger breakdown.