The Depreciating Dollar: Economic Effects and Policy Response

by Sabrina I. Pacifici on February 27, 2012

The Depreciating Dollar: Economic Effects and Policy Response. Craig K. Elwell, Specialist in Macroeconomic Policy, February 23, 2012

  • “A trend depreciation of the dollar since 2002 raises concern among some in Congress and the public that the dollar’s decline is a symptom of broader economic problems, such as a weak economic recovery, rising public debt, and a diminished standing in the global economy. However, a falling currency is not always a problem, but possibly an element of economic adjustments that are, on balance, beneficial to the economy. A depreciating currency could affect several aspects of U.S. economic performance. Possible effects include increased net exports, decreased international purchasing power, rising commodity prices, and upward pressure on interest rates; if the trend is sustained, the United states may also experience a reduction of external debt, possible undermining of the dollar’s reserve currency status, and an elevated risk of a dollar crisis. The exchange rate is not a variable that is easily addressed by changes in legislative policy. Nevertheless, although usually not the primary target, the dollar’s international value can be affected by decisions made on policy issues facing the 112th Congress, including decisions related to generating jobs, raising the debt limit, reducing the budget deficit, and stabilizing the growth of the federal government’s long-term debt. Also monetary policy actions by the Federal Reserve, over which Congress has oversight responsibilities, can affect the dollar.”
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