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The recent subprime crisis and the slowdown in the economy have led to many US dollar predictions on its future. Here we look at a few of predictions made and the possible reasons backing those US dollar predictions.
The most important question about the future of US dollar is the possibility of a meltdown. Most analysts have agreed that although, there are signs of the US dollar weakening in the near future, the probability of a meltdown is very slim. Thus US dollar predictions in this regard can be disregarded.
Because of the possibility of a slowdown, the Federal Reserve has already reduced interest rates twice in the recent past. There is a possibility that there might be further rate cuts. However, the central banks of other countries are not reducing the interest rates. Thus, the interest rate differential seems to be out of favor with the US dollar. The US dollar predictions in this regard point towards a weakening of US dollar because of this reason. Thus we are likely to see other currencies gaining against the US dollar in the next few years.
The US dollar predictions also site that the current account deficit is likely to decrease, mainly because of decrease in consumption within US which is going to drive down the imports. This will help strengthen the US dollar a bit as this will help the domestic market grow faster.
Although it is highly unlikely that the foreign investors will start dumping all US assets, there is also a decrease in fresh buying of US assets, mainly because structured products are not hitting the market now, because of the housing market slump. Also, fixed income products have also decreased because of the chances of a recession in the market which further accentuated the lowering of investments from outside the United States. These factors add credence to the US dollar predictions of weakening in the near future. The stock market returns in emerging markets have been much better than that of the US. This has led to the increase in fixed income securities rather than stocks.
The Euro has gained significantly against the dollar over the last few years. Because of the much stable economic environment of the European Union countries, this currency has turned out to be much more stable than dollar. It is not surprising that many OPEC countries have stated accepting Euro as the currency for selling of oil. Another of the US dollar predictions is that Euro will keep gaining popularity at the cost of US dollar and may soon be in a position to challenge the monopoly of the dollar.
Above were some of the US dollar predictions that are being made. However, the economic environment may change rapidly and so will the predictions. So stay tuned.
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