What happens to US Dollar as the deflation takes hold of the economy?
Alan Hershey
Feb. 10, 2007

Deflation is always accompanied by scare in the Central Bank. They will lower rates faster than the meteorite hits the ground. But to the surprise of the Fed, the long terms rates will actually go up. Interest rate changes will stop working its magic. This is normal in deflation. Once the economy gets into deflation, it is difficult to come out of the same. With so high budget deficit and private debt, it will decades before deflation is over.

In that case what will happen to dollar? Dollar will actually strengthen like never before in recent history. The U.S. economy will be relative stronger compared to Asia and Europe. All will have negative growth but U.S. economy will have lowest negative growth. The asset at the time of deflation is the buying power. U.S. economy has that power – largest middle class with enormous buying power. The investments (Foreign Direct Investments) will rush back to America. The trade deficit will turn into trade surplus. America will export more than it imports. The Asian and European currencies will go down due to lack of buying power while US Dollar will go up steadily. Only one currency will be stronger than the US Dollar – the Canadian Dollar.

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