The Dollar Is Falling, But Not the Sky

Joseph Lazzaro

posted: 43 DAYS 4 HOURS AGO

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Before one starts composing a eulogy for the U.S. dollar, it pays to make two distinctions: 1) There's a difference between the dollar's decline and a collapse. 2) Any move away from the dollar as the world's reserve currency must include a credible replacement for it.

True, the dollar on Wednesday did weaken to a 14-month low versus the euro, to $1.4913, but investors should keep in mind that this comes after the dollar had risen about 20% versus the euro, pound and yen from mid-2008 to March 2009. Further, as Financial Times Columnist Martin Wolf points out, little occurred during the financial crisis' acute stage suggesting that a credible, universal effort is at work to abandon the dollar. On the contrary, during the horrible period of low banker-to-banker confidence, investors piled into the dollar on a flight to safety, driving its value up during the worst of times.

Moreover, with confidence and perhaps the global economy now growing again, that money is starting to do what you'd expect it to do, Wolf says: flow out of the dollar and into higher-risk/higher-return investments. Hence, the recent dollar weakening is a positive development for the global economy, Wolf notes. The move also returns the dollar's value basically to where it was before the financial crisis.

2009-10-14 15:11:19