Today the dollar slid to record lows against the Euro and to local minima against the Yen. Some of this is due to the new protectionist measures imposed by Bush on Chinese textiles.
However as I outline at my
blog there are far bigger concerns than just a temporary readjustment due to policy changes.
Kash at Angry Bear notes that the Treasury Department is reporting that international investers fundamentally cut off their purchasing of US dollar denominated assets in September. This is even after the Bank of Japan purchased $40 billion dollars in dollar denominated assets in order to drive the price of the yen down. Someone (the Bank of China) is dumping dollar denominated assets.
The primary reason for this dollar dump is that quite a few institutional holders of dollars are getting worried about the health of the US economy. The US is running large foreign accounts deficits that if they were occuring in a developing country it would be setting off alarm bells. There may be growing doubt about the US ability to be a good debtor.
If this trend continues the United States will begin to experience short term inflation and massive dislocations as the current cheap imports become expensive but local substitutions will not exist in sufficient numbers of quantities. Additionally, the US will have problems financing the current accounts deficit and the federal budget deficit as interest rates will need to be raised in order to attract sufficient foreign capital.
Hopefully I am wrong, but I do not think that I am.