Going Down with the Dollar: Possible Scenarios and Implications of Currency Adjustments

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Wall Street and Beltway pundits have been busy warning investors about the dangers that the falling dollar will pose to their investments abroad. But what does the falling dollar mean for U.S. workers’ wages and jobs, the stability of the U.S. economy, the prices of goods here, and economies abroad? This memo provides information useful to trade and globalization activists as well as for those who may become activated after understanding what is at stake.

The Value of the Dollar Affects Trade

The terms of the trade and investment agreements with which the United States complies – such as the North American Free Trade Agreement (NAFTA) and World Trade Organization (WTO) – greatly influence where and how goods and services are produced and where and how they are consumed. However, in tandem with these commercial agreements, the value of currencies greatly influences trade
flows. Over the past two decades, the U.S. trade balance had closely followed the U.S. dollar, as shown in Table 1. In other words, the more expensive the dollar gets as measured in other currencies, the less likely other countries are to import our expensive goods; the cheaper the dollar gets, the more likely they are to import our goods. The reverse is also true: U.S. corporations and citizens make their decisions to import from other countries based on the strength or weakness of the dollar, with the flow of such imports made much easier by the terms of recent trade pacts