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Larry Summers' Explanation For USD Decline

Jeffrey Frankel profile picture
Jeffrey Frankel

Why has the dollar fallen since January 2017? My answer is an economic turnaround in the rest of the world. Also, the level of the dollar remains rather high. But Larry Summers has a different answer.

Many of us started warning in the 1980s that erratic US fiscal and foreign policy would eventually put an end to American exorbitant privilege - that foreigner investors would finally tire of holding ever-greater quantities of dollars. I renewed the prediction when GWB brought back the twin deficits 15 years ago.

I gave up making such claims after the 2008 Global Financial Crisis produced a global rush to the US safe haven notwithstanding that the sub-prime mortgage crisis had originated in the US.

But Summers makes a case in Monday's FT that Trump's erratic fiscal and foreign policies are finally bringing us to this point: "Currency Markets Send a Warning on the US Economy." It is well-argued, as always. But if investors were beginning to doubt the solidity of US assets, I might have expected to see more upward pressure on US interest rates than we have seen.

This article was written by

Jeffrey Frankel profile picture
Jeffrey Frankel is Harpel Professor of Capital Formation and Growth at Harvard University’s Kennedy School of Government. He is a Research Associate of he National Bureau of Economic Research, where he is also a member of the Business Cycle Dating Committee, which officially declares recessions. Appointed to the Council of Economic Advisers by President Clinton in 1996 and subsequently confirmed by the Senate, he served until 1999. His responsibilities as Member included international economics, macroeconomics, and the environment. Before moving East, he had been professor of economics at the University of California, Berkeley, having joined the faculty in 1979. Other past appointments include the Federal Reserve Board, Institute for International Economics, International Monetary Fund, and Yale. His research interests include international finance, currencies, monetary and fiscal policy, commodity prices, regional blocs, and global environmental issues. He graduated from Swarthmore College and received his PhD from MIT. Visit Jeffrey Frankel's Weblog (http://www.jeffrey-frankel.com/)

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