Policies to halt the slide of the dollar
1. Increase US interest rates
· Higher interest rates will attract more hot money flows into the US and therefore cause an appreciation.
· Also higher interest rates will cause an increase in savings and a fall in spending this will help reduce imports into the US
· However the Fed is reluctant to do this because it will lead to lower growth and with inflation at only 1.3% it suggests there is still spare capacity in the US economy.
2. Deflationary fiscal policy.
If the US govt increased tax and reduced spending this would help to increase the value of the dollar because.
i) It would help reduce AD and therefore reduce import spending
ii) Reducing the budget deficit is important for increasing domestic savings and protecting the value of the $.
3. Intervention on the foreign exchange
· If US in conjunction with other central banks such as the EU and Asian countries buy dollars this will help increase its market value.
· However this is difficult to achieve in the long term because govt only have limited resources to protect the currency financial speculators have greater power.
4. Decrease interest rates in the EU.
· Lower interest rates would reduce speculative flows into buying the Euro and increase the demand for $.
· However the ECB has stated it would be reluctant to do this because they are concerned inflation may exceed its target of 2%