A weaker dollar may be the best way to ensure the long-term success of the US economy, improve political cohesion and reduce the risk of default
A woman counts a bundle of US bills in Indonesia. Picture: DIMAS ARDIAN/BLOOMBERG
There are many reasons dedollarisation may be good for the US. A weaker dollar could make US exporters more competitive and encourage localisation. This could improve the US trade balance and lead to smaller government budget deficits. Dedollarisation could even enhance the country’s political cohesion as rural states regain their manufacturing competitiveness. As such, the US may be one of the biggest beneficiaries of a more diversified global currency system.
Lower trade deficits may also lessen the debt burden on the government as the US would be better equipped to fund imports with export income rather than debt. Dedollarisation may help resolve some of these issues. It would likely produce a weaker dollar as demand for the greenback in trade and foreign reserve holdings declines. This would make imports more expensive and US exports more competitive in international markets, reversing a multidecade trend that has seen the US lose much of its manufacturing competitiveness to the detriment of less-educated workers.
Of course, a weaker dollar could produce higher levels of inflation and consequently result in interest rates remaining higher for longer. But this may actually be a good thing for the US. Higher interest rates could help prevent speculative bubbles, make homes more affordable, and encourage sound investment decisions, which would result in higher productivity. A weaker dollar could also boost foreign earnings of US firms who operate abroad.
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