Will the US economy fall into a recession?
The past year has been very crucial for the U.S Dollar. In Jan, where its rate in terms of Indian Rupee was 44.2, it sunk to 38.4 by the end of the year. Also, if we look at the other currencies of the world, the U.S Dollar has become weaker comparatively. For instance, the price of Australian Dollar and Euro did not change much over the year. Infact, there was an increase in the Canadian dollar, even if it was a small one. Leaving British pound being as an exception, all other currencies were not affected as U.S Dollar.
It hasn’t happened overnight though. Everybody’s aware of the falling price of the U.S Dollar in the foreign exchange market.
The consumer demand has slowed down over the year. And its continuous dropping rate has made the trade analysts wonder if the U.S economy will fall into a recession. Because if it does, it will not be a surprise to anyone. But if it really does, then where does the U.S dollar stand? This is a fateful question whose answer is dreaded by everyone.
The U.S market is seeing a slump in all the areas whether electronics, furniture, clothing. According to a news agency, 2007 has been the worst year for the U.S retailers since 2002. The growth in the labor market already retarding, it might lead the U.S economy into a recession.
Before going further, let’s find out what recession actually means.
Recession is a decline in a country’s gross domestic product (GDP) for two or more consecutive quarters of a year. Following this definition, we can say that the US economy is still safe from being descended into a recession. The reason being that in the last two quarters; its GDP growth was quite satisfactory. There has been just one bad quarter and the first quarter for 2008 has started, so it’s too untimely to judge the future of the US economy.
In this regard, the Federal Reserve has a big role to play. It has the power to determine
whether US economy will land in a recession. Traders were looking up to the Fed to help them out in this time of crisis. In a little more than a week, the Federal Reserve has lowered the interest rates by a total of 125bp, which is more than all of the rate cuts that they had made last year.
At present the US dollar is yielding only 25bp more than Switzerland’s Franc, which means that once the Fed lowers the rates again in March, as expected, then the US dollar will be tied with the Franc as second lowest yielding currency. Â
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In the meantime, there has been a huge hike in the price of Gold, thereby weakening the price of US dollar all the more.
What will the year 2008 bring in for the US dollar is still uncertain. Will the price of US dollar decline all the more in the Foreign Exchange market or will it fight with the current situation and emerge as a superpower as always. Well for this, we will just have to sit and watch.